The interbank cost of borrowing euros marked a fresh low on Thursday as the European Central Bank, as widely expected, kept its key interest rate unchanged at a record low of 1.0 percent. The three-month euro London interbank offered rate was set at 0.63188 percent, down from 0.63250 percent on Wednesday.
The equivalent dollar and sterling rates were unchanged at 0.25125 percent and 0.61000 percent respectively. The fall in the euro rate was driven by ample liquidity, lower volatility and diminishing risk of a rate hike in the foreseeable future, said Patrick Jacq, strategist at BNP Paribas in Paris.
"Excess liquidity will remain very elevated, and we saw on yesterday's ECB balance sheet there were almost 250 billion euros on the deposit, so clearly market remains very liquid," he added. In December, the ECB injected nearly 100 billion euros of one-year funds into the money market in its third and last offering of such funds.
At the first one-year tender in July, the ECB provided banks with 442 billion euros. This was followed by a 75 billion euros injection in September. Unless the ECB actively drains liquidity, analysts said the current liquid conditions will persist at least through the first half of 2010. Given uneven growth and low inflation, the ECB is expected to remain in a holding pattern.
ECB President Jean-Claude Trichet said overall, the Governing Council expects the euro area economy to grow at a moderate pace in 2010, believing the recovery process is likely to be uneven with the outlook remaining uncertain. All 80 economists in a recent Reuters poll had expected rates to remain on hold for the eighth month in a row and all but a handful see the central bank keeping them there well into the second half of the year as it waits for the recovery to firm.
Two top Federal Reserve policymakers also sounded a cautions tone saying the US central bank will need to be certain the economic recovery is firmly in place before tightening its monetary policy stance. New York Federal Reserve Bank President William Dudley and Chicago Federal Reserve Bank President Charles Evans said on Wednesday continued credit problems and a high rate of unemployment are constraints on the US economic recovery.
In contrast, the three-month Aussie Libor jumped to 4.17250 percent from 4.13750 percent to the highest since January 28, 2009 after stunning jobs data boosted bets on an almost certain chance of an interest rate rise in February. For a fourth straight month in December, Australian employment blew past expectations while the jobless rate fell to an eight-month low, a remarkable result that argues for yet higher interest rates.
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