The interbank cost of borrowing euros held steady on Thursday after rising for three straight days as data showed cash-flush banks were still reluctant to lend it onto the wider economy.
London interbank offered rates for three-month dollars hit another record low against a background of rising risk aversion in financial markets on concerns about debt problems in Dubai, sharply depressing shorter-dated government bond yields.
In the eurozone, private sector loans contracted by 0.8 percent in October from a year earlier, data showed, the second year-on-year fall since data began to be collected in 1991 despite the European Central Bank lending banks massive amounts of cheap funds since the financial crisis started. The data comes before the European Central meets next week to decide how it will phase out its liquidity lifeline.
"The ECB is expecting a moderate and gradual recovery partly based on the idea that domestic demand will remain rather sluggish," said Nick Kounis, an economist at Fortis. Three-month euro Libor was fixed unchanged at 0.67813 percent while equivalent sterling rates were also unchanged. here was no overnight fixing for dollar Libor as US markets are closed for Thanksgiving.
Euro Libor from three months on had been rising since Monday after the ECB took a tentative step last Friday towards implementing tighter monetary conditions. It said then it would tighten its rating requirements for banks using asset-backed securities (ABS) as security in its lending operations.
Policymakers have also ratcheted up their rhetoric, with ECB Governing Council member Axel Weber saying central bank and government support had hit its limit and exit strategies could not be deferred into the never-never. "There is a divergence emerging between the communication which seems a lot more hawkish than the data justifies and the actual level of pace of activity," said Lena Komileva, head of G7 market economics at Tullett Prebon in London.
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