The interbank cost of three-month euro funds was virtually unchanged in August, in contrast to falling dollar rates, as investors anticipate the European Central Bank will extend cheap liquidity into 2011. The three-month euro London Interbank rate was fixed at 0.83000 percent on Tuesday, the same as on Monday and barely changed from July's final fixing of 0.83250 percent.
The ECB is expected to say after its monthly meeting on Thursday that it will to continue to lend banks unlimited shorter-term cash into next year. In sharp contrast, three-month dollar Libor has made a big downward move, to 0.29563 percent on Tuesday from 0.45375 percent a month ago. It was near record lows of around 0.24 percent seen earlier in the year.
On Friday, Federal Reserve Chairman Ben Bernanke delivered his much-awaited Jackson Hole speech with a promise to act if needed to spur the economy. The eurozone's central bank is widely expected to leave interest rates on hold at an historic low of 1.0 percent on Thursday and to extend its offer of unlimited cash at its main weekly refinancing operations and three-month operations into early 2011.
Europe's banks accepted lower returns from the ECB on their cash on Tuesday, as a seven-day tender to finance the ECB's 61 billion euros bond-buying operation was conducted. This week's move by the Bank of Japan to ease monetary policy to provide cheap fixed-rate loans to the banking system helped push the yen interbank rate lower but analysts said it was unlikely to stimulate demand for credit.
While the German economy grew at its fastest rate in the second quarter since the country's reunification in 1990, peripheral sovereigns face poor growth rates and austerity measures to combat ballooning budget deficits. In turn, many Spanish, Greek, Portuguese and Irish banks continue to face problems funding themselves and rely on ECB liquidity, SEB's Kobel said. Irish banks' borrowings from the ECB slipped to 89.5 billion euros in July from 94.79 billion in June, data from the eurozone's central bank showed, but remained heady.