Euro interbank lending rates mostly fell and market-based short-term interest rates were broadly steady on Thursday as dealers continued to digest the this week's European Central Bank tender of one-year funds. A Bank of England survey on Thursday, meanwhile, showed British lenders expect to make credit more easily available in the fourth quarter.
They boosted the supply of credit in the third quarter although a narrow majority of banks reduced mortgage lending.Interbank and short-term interest rate markets on Thursday retreated from their initial move on Wednesday in response to the ECB's 75 billion euro allotment, which was generally to push lending and market-based rates up from historic lows. This was on the view that although the surprisingly low take-up at the tender reflected improving market conditions, it would ultimately result in less liquidity.
But the consensus on Thursday appeared to be that although markets had expected 135 billion euros to be allotted, there is still plenty of liquidity in the system well into next year, which should keep rates pretty well anchored.
"Making one-year funding available continues to push down interbank rates. What we're seeing is, despite some form of (liquidity) drain, there is still seen to be sufficient long-term liquidity available to use as a backstop," said Dennis Gepp, chief investment officer at Prime Rate Capital Management, a London-based money market fund with over $1 billion of funds under management.
Financial institutions in the eurozone took just 75 billion euros of one-year funds at the ECB's longer-term refinancing operation, well down from nearly half a trillion euros allotted at the first one-year tender in June and below an expected uptake of 135 billion euros.
Euro London interbank offered rates (Libor) were mostly lower on Thursday across the maturities to one-year. Overnight rates fell back, as expected, after jumping 17.5 basis points on Wednesday on month-end funding pressure and liquidity drain after a small rollover of expiring one-week funds. Benchmark three-month euro Libor dipped around a quarter of a basis point to 0.70438 percent.
Euribor futures contracts maturing in the middle through the end of next year were broadly steady on the day, up off the previous session's lows after the initial post-ECB selloff and thereby capping implied interest rates. The debate on when, how quickly and how far central banks remove their extraordinary policy stimulus has intensified in recent weeks as some monetary authorities - most notably the US Federal Reserve - have taken baby steps in that direction.
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