Euro rates ease with ECB exit seen delayed

Eurozone interbank lending rates eased further on Tuesday, helped by expectations the European Central Bank would refrain from withdrawing its remaining emergency liquidity support measures until next year. ECB Governing Council member Axel Weber said on Friday the central bank should extend unlimited lending to banks past the end of the year and resume exit discussions in early 2011, cementing expectations full allotment policy will be extended for at least three months in the ECB's September meeting.
"(Rates) are in a gradual drift down from that," a money market trader said. Meanwhile, banks appeared to have reached an equilibrium level of borrowing from the ECB, with around 100 million euros of excess funds in the banking system, also keeping downward pressure on rates.
Eurozone banks borrowed 150 billion euros in one-week funds, compared with a maturing amount of 155 billion euros and they have another opportunity to borrow three-month funds on Wednesday, when 12 billion euros mature. "The 5 billion reduction will probably all shift into tomorrow's tender and we expect take-up in the region of 25 billion euros," said Commerzbank rate strategist Christoph Rieger.
Banks, however, have at least one more opportunity to take in unlimited three-month funds at the end of September. "Therefore, we are unlikely to see a sizable increase...tomorrow," Morgan Stanley rate strategists said. The ECB has said unlimited liquidity will be on offer in the one-week and one-month operations until at least mid-October, and until the end of September for three-month money.
All that means the rise in money market rates seen in July after banks repaid 442 billion euros of one-year funds has seen a correction. Overnight lending rates, at 0.42 basis points, are some six basis points less than four weeks ago, while three- month Eonia rates are down almost nine basis points.
The moves have helped push Libor fixings lower and three-month euro Libor rates fixed at 0.82750 percent, falling for a sixth day. Three-month dollar rates `fell almost two basis points to fix at 0.30750 percent, its lowest in four months, after recent economic data supported the view that the Federal Reserve would keep rates at ultra-low levels for longer. The rate is moving back towards January lows below 0.25 percent, having risen close to 0.54 percent in June before fears of a double-dip recession took hold.