Benchmark sterling interbank lending rates paused at 5-week highs on Friday after Britain's economy unexpectedly contracted again, while abundant amounts of liquidity kept euro and dollar rates pinned at record lows. Three-month sterling Libor held steady at 0.59500 percent after steadily rising for most of this month as the prospect of more Bank of England policy easing dimmed.
UK gilts and short-sterling interest rate futures rallied after data showed Britain's economy shrank unexpectedly in the third quarter of this year, marking the longest recession on record.
"The clear indication here that the UK remains mired in an unprecedented recession provides a compelling argument in favour of the BoE opting for a precautionary increase in the quantitative easing limit come November 5," said Richard McGuire, rate strategist at RBC Capital Markets. The BoE holds its next policy meeting on November 4 and 5. Meanwhile, excess liquidity in the euro zone remained elevated at around 90 billion euros, with overnight deposits rising back over the 75 billion euro mark.
That was still enough to keep EONIA fixings stuck around 0.35 percent, despite more than 11 billion euros of one-week funds draining from the market this week. "Liquidity drains are now occurring also on a more noticeable level in the weekly (refinancing operations), which suggests mounting upward pressure on fixings in coming weeks," said Christoph Rieger, a Commerzbank rate strategist.
Analysts polled by Reuters estimated banks would take anywhere between 30 billion and 200 billion euros at the tender. Three-month euro Libor was unchanged at a record low of 0.68813 percent. Three-month dollar Libor rates were down a smidgen at a new low of 0.28188 percent as the Federal Reserve's balance sheet showed US banks holding record amounts of excess cash.