Key euro interbank lending rates fell for the first time since mid-April on Friday after banks increased their uptake of cash from the European Central bank, signifying that the recent uptrend in money market rates is likely to capped by unrestricted ECB liquidity.
The three-month Euribor rate - traditionally the main gauge of interbank euro lending and a mix of interest rate expectations and banks' appetite for lending - fell to 0.896 percent from 0.899 percent the previous day, the first fall since April 19.
One-year rates fell to 1.417 percent from 1.419 percent, shorter-term one-week rates dropped to 0.577 percent from 0.584 percent, while six-month rates remained at 1.145 percent. Interbank rates have been on an upward path since the end of March, when a combination of the euro zone debt crisis and a nearing 442 billion euros payback of ECB one-year loans, brought an end to a 1-1/2 year decline which saw 3-month rates go as low as 0.634 percent.
The rise had been sustained on the belief that the ECB will continue to scale back its lending support, and as banks have reduced their consumption of ECB loans, although they increased their uptake again this week. The crunch point should come at the ECB's September 2 policy meeting when it is expected to decide whether to keep uncapped loans available beyond mid-October for shorter-term one week money and the end of September for three-month money.
ECB President Jean-Claude Trichet expressed little concern about the recent rise in Euribor rates earlier this month, and other ECB members have said it is part of the post-crisis normalisation process. One trader at a large European bank said on Friday that there had been "quite a big improvement" in money markets in the last week since the publication of European bank stress tests, adding that asset managers and pension funds had started offering funds again.
"The 6-month to 1-years (markets) have been dead but this week we are seeing quite a lot of sixes and nines. Also banks that were having to pay up by 15 basis previously aren't having to do so anymore," they added, on the condition of anonymity. However, another money market expert said that while there had been a clear improvement, weaker banks were still struggling to get funds longer dated than one month. He also noted that the ECB's uncapped funding injections would continue to have a major influence on market rates.
"There will be a point where the equilibrium is reached. The more market rates rise, the more attractive ECB funding becomes. That increases the amount of excess liquidity in the market which pushes down interbank rates."
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