The interbank cost of borrowing euros for three-months marked a new low on Tuesday as the end of the first half of the year looked set to pass with minimal strain on money markets following last week's huge injection of liquidity.
Benchmark three-month dollar and sterling Libor rates also fell, but overnight rates in all three currencies inched higher as banks demanded cash to balance their books on the last day of the month. However the increases were only in the region of one or two basis points, compared with over a full percentage point in the overnight dollar rate at the same point last year.
With 442 billion euros of 1-year money sloshing around the system after the European Central Bank's historical liquidity providing operation last week, most euro Libor rates ground lower. Once again, a large amount of that money made its way straight back to the ECB, suggesting banks are cautious about lending the money on, preferring to hoard it at least until books have been balanced at the end of June.
The ECB said 242 billion euros were deposited overnight, a five-month high, and interbank trading activity remains subdued. However traders expect a pick up later in the week once the second half of the year begins and banks have new counterparty limits available.
"The proximity of half-year end... will likely have limited the full effect of (the ECB's) liquidity injection in lowering rates and stimulating interbank lending activity," ICAP economist Don Smith said. Three-month euro Libor rates fixed 1.1 basis points lower at 1.095 percent on Tuesday, while equivalent dollar rates crept down to 0.59500 percent.