Eurozone rates stay steady

Benchmark eurozone interbank lending rates were broadly steady on Tuesday as banks held on to their excess liquidity, while Greece kicked off its new monthly schedule of short-term debt auctions. The European Central bank lent banks 151.6 billion euros in one week funds, slightly below the 154 billion maturing, keeping excess liquidity in the banking sector around 100 billion euros, according to Morgan Stanley.
Liquidity in the banking system is expected to remain reasonably steady until the end of September when 225 billion euros of three-, six- and 12-month loans mature. Although the ECB has pledged to extend unlimited financing operations into next year, the level of short dated rates going forward will depend on how much of the maturing debt banks roll over.
"We continue to see risks on the upside, especially in the final week of September when uncertainty related to the roll of the...expiring liquidity should fuel volatility on EONIA," Barclays Capital strategists said. Reflecting that, the forward Eonia rate based on October's ECB meeting is currently priced at 0.51 percent versus an average Eonia fixing of below 0.43 percent during the August maintenance period, Societe Generale said.
Bank of Spain data showed that borrowing by the country's banks eased to 126 billion euros ($162 billion) from a record high of 140 billion euros in July, although that was still way above levels seen earlier this year, showing how reliant some banks are on ECB cash. Meanwhile, Greece sold 1.17 billion euros ($1.5 billion) of six-month T-bills but paid a higher yield compared to a previous sale in July.
Greek banks likely bought the bulk of the issue as they can use the T-bills as collateral to borrow funds from the ECB, given that their access to wholesale funding markets remains closed. Benchmark three-month euro libor rates fixed at 0.82463 percent, with equivalent dollar rates edging down to 0.29188 percent. Overnight borrowing at the ECB jumped to a one-month high, but traders said this was largely due to a glitch in the Bundesbank's computer settlement system. Over the longer term, the Basel III agreement reached at the weekend should encourage banks to reduce reliance on short-term debt. That, Nomura's head of Asian interest rate strategy, Des Supple said, could potentially lead to lower neutral policy rates.
That would mean policy rates, such as those set by the ECB and BoE, do not need to be as high to achieve a tightening or even a neutral bias. Using Australia, - which has been implementing a liquidity framework similar to Basel III since 2008 - as an example, the current neutral policy rate is 4.5 percent, compared with 5.5 to 6 percent before the financial crisis, he added.