Money markets euro interbank rate fall stalls after ecb

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* Forward euro overnight rates rise further after ECB* Traders scale back bets on negative ECB deposit rate* Interbank rates could resume fallBy Emelia Sithole-Matarise and Sakari SuoninenLONDON/FRANKFURT, Aug 3 The euro zone's key bank-to-bank lending rate held at an all-time low on Friday, with further falls capped after the head of the European Central Bank' raised doubts about the prospect of pushing the deposit rate into negative territory. ECB President Mario Draghi's comments on Thursday increased expectations the bank could cut the main refinancing rate below the current record low of 0.75 percent, but, at the same time tempered bets on the central bank starting to charge banks for depositing funds with the ECB overnight. Forward euro overnight Eonia rates, the best gauge for money market expectations of future moves in the ECB's deposit facility rate, whch the bank cut to zero last month, rose for a second day after Draghi's remarks, showing traders were scaling back bets on a move into negative territory. Draghi said on Thursday that negative rates represented "uncharted waters".

The forward Eonia rate for September, when the ECB holds its next policy meeting, traded around 8 basis points, compared with 5 bps late on Thursday, implying an unwinding of bets on a cut in the deposit rate. The rest of the 2012-2013 strip was also higher."I'm not sure they want to drop the depo rate into negative territory so I attach a very low probability of them doing so after the sell-off we've seen in Eonia forwards for the next ECB meeting," said Barclays Capital strategist Giuseppe Maraffino. The ECB's overnight deposit rate, which it cut to zero on July 5, acts as a floor for money market rates as banks only lend to their rivals if they can earn a better rate of interest than at the central bank. The ECB hopes its unprecedented move will nurture a return of more significant interbank lending by forcing banks to look for more profitable options but so far the jury is out on the success of the measures.

Three-month Euribor rates, traditionally the main gauge of unsecured bank-to-bank lending, remained at 0.375 percent. However, three-month Euribor futures implied a further fall in the fixing of the interbank rate to 0.33 percent. Maraffino said he expected Euribor to fix as low as 0.30 percent as the market anticipates a cut in the ECB's refinancing rate next month to a record low of 0.50 percent and a deposit rate at zero. FLAT-LINING EONIA

Other interbank rates rose slightly. Six-month Euribor rates ticked up to 0.659 percent from 0.657 percent and one-week rates increased to 0.097 percent from 0.096 percent while overnight rates eased to 0.109 percent from 0.112 percent. Commerzbank strategists saw limited scope for further falls in overnight Eonia fixings even if the ECB deposit rate went negative."As witnessed in repo and T-bills markets, the decline (in rates) has slowed when approaching zero and spreads have narrowed," Commerzbank strategist Benjamin Schroder said in a note."There could also be technical issues which slow the implementation of negative rates or trades within banking alliances might stop just short of trading at negative rates internally. The latter are already now adding an upside bias to Eonia fixings,"The ECB's move to stop paying interest on banks' deposits saw almost half a trillion euros transferred from the facility to its bank's current account. But with the monthly reserves cycle nearing its end and fewer options available for banks to juggle their funding, the outflow has slowed. A total of 324 billion euros was parked in the ECB's deposit facility overnight. Banks' current account deposits at the ECB rose to 530 billion euros.