Interbank lending costs fell on Monday after a surprise contraction in Britain's third-quarter economic growth boosted bets the Bank of England would expand its quantitative easing program. Those bets occurred even though US Treasuries prices retreated in the United States, partly on fear that the Federal Reserve might withdraw monetary easing sooner than expected. Treasuries prices were also down in front of supply and as stocks rose.
Ample liquidity helped drive equivalent dollar and euro London interbank offered rates to new record lows, while the debate continued over when and how central banks will unwind their raft of extraordinary fiscal stimulus measures. The three-month New York Funding Rate was 0.2931 percent, according to ICAP. The one-month NYFR was 0.2444 percent.
Three-month dollar and euro Libor fell to fresh all-time lows of 0.28063 percent and 0.68313 percent respectively. Three-month sterling Libor rates, which rose to five-week highs last week, fell to 0.59375 percent in the wake of Friday's GDP data, which also drove the British pound to one-week lows against the euro and the dollar. "This means that money market rates on sterling will remain fairly low and the pound should continue to fall especially versus the euro," said Patrick Jacq, interest rate strategist at BNP Paribas in Paris. "Clearly there's room for some limited drop in the short sterling rates."
The benchmark sterling Libor rate had been rising since early October on speculation the BoE might halt its asset purchase programme at 175 billion euros and as expectations waned that it would change the way in which commercial banks' reserves are remunerated. "A small negative premium for a cut in the rate the BoE pays on reserves should probably remain priced in for a while yet, notably with the weak GDP the market might once again start to talk about a possible depo-rate cut," Societe Generale strategists said in a note.
Focus in eurozone markets is on the one-week and three-month refinancing operations this week which have seen shrinking demand as banks in the region have shifted much of their funding needs into one-year money from shorter maturities.
Excess liquidity in the eurozone remains elevated with commercial bank deposits at the European Central Bank's overnight vaults rising above the 80 billion euro mark. The excess liquidity has kept EONIA fixings stuck around 0.35 percent, despite more than 11 billion euros of one-week funds draining from the market last week, and some strategists expect this week's expected decrease in liquidity was likely to have limited impact on rates. The amounts parked at the ECB's deposit facility have been high since it flooded money markets with almost half a trillion euros in the first of three planned injections of one-year funds at the end of June.
It dumped a further 75 billion euros of one-year money into the system in the second instalment at the beginning of the month. The ECB, which lent banks one-year funds at a rock-bottom 1 percent interest rate in June and September, has one more such tender in December, possibly its last of ultracheap one-year funds. Analysts polled by Reuters estimated banks would take anywhere between 30 billion and 200 billion euros at the tender.
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