Benchmark euro interbank lending rates edged lower on Monday as the market adjusted to the prospect of unlimitedd liquidity into the new year The European Central Bank, which also kept its benchmark interest rate steady at a record low 1.0 percent last week, said it would keep offering three-month cash until December, indexed to its policy rate.
Benchmark three-month euro Libor rates fixed at 0.29219 percent, with equivalent US dollar rates falling to 0.29219 percent. US markets were closed for the Labour Day holiday, keeping market activity subdued. "If you have collateral and have access then you have liquidity available until the new year, which takes the fear away from the market," one trader said.
The ECB's move to keep providing banks with unlimited short-term funds will help take the sting out of 225 billion euros of expiring loans due at month-end, capping euro interbank rates. But the ECB said its monetary policy stance remains "accommodative" and warned provision of liquidity would be "adjusted as appropriate".
"These are two very significant insertions into the (ECB's) statement and amount to giving the market fair warning that, while the finger might not exactly be on the interest rate trigger, the safety catch is now off," Societe Generale economist James Nixon said. With the ECB's extension of unlimited liquidity, RBS strategist Harvinder Sian expects excess cash in the banking sector to remain in a 75-100 billion euro range until year-end, keeping the Eonia overnight rate around 0.41 percent.
But UniCredit said excess liquidity may wane as banks require less of the emergency funding. "The path of money market rates in the coming months will be entirely demand driven," the bank's strategists said. Meanwhile, Broker ICAP said a pick-up in volumes in the repo market as the end of the holiday period coincided with this week's September bond futures delivery date, with the cheapest-to-deliver bonds among the most active.
The Spanish repo market has sprung back to life with the country's banks securing funding via the newly launched LCH. Clearnet clearing service which removes the need to deal directlyy with Spanish counterparties "Those Spanish banks who now have access to LCH...are lining up on the offered side of the term market, absorbing large volumes of term funding at prices sharply discounted from those available in the local, bi-lateral market," ICAP said.
Those local Spanish banks dealing on a bilateral basis with international banks have to pay around 75 bps over EONIA to secure term funds, the broker said, while those using central counterparty clearing are seeing rates of around 3 bps to 5 bps over EONIA - roughly in line with Italian and Portuguese general collateral rates.