Key euro-priced bank-to-bank lending rates rose on Friday after the ECB's much-hyped reintroduction of 1-year liquidity added little cash to money markets and question marks remained over banks' health following the latest EU crisis summit.
Banks took 57 billion euros on Wednesday in the first of two new offerings of one-year loans by the ECB. But a move by them to simultaneously cut back their intake of shorter term ECB loans resulted in just 16 billion euros being added to overall liquidity levels.
Three-month Euribor rates, traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending, rose on Friday to a new 2-1/2 month high of 1.592 percent from of 1.590 percent.
Rates in longer maturities followed suit. Six-month Euribor climbed to 1.793 percent from 1.788 percent and longer-term 12-month rates increased to 2.129 percent from 2.119 percent. Shorter-term one-week rates, traditionally the most influenced by excess market liquidity, bucked the trend, falling to 1.136 percent from 1.140 percent. Overnight interest rates fixed lower at 0.923 percent on Thursday.
Worries over the euro zone debt crisis, and its impact on banks, continue to weigh against the current heavy overhang of money market liquidity, provided mainly by the ECB. In the early hours of Thursday, European leaders made progress on their plans to recapitalise banks and scale up the size of the euro zone's 440 billion euro bailout fund although question marks remain over whether it will be enough to bring the debt crisis under control.
Bank overnight deposits at the ECB also underscored the tensions dominating money markets. Banks parked 218 billion euros at the central bank overnight, taking the lower interest rate from the ECB rather than risk lending to each other. On top of that, the use of the ECB's emergency overnight lending facility remained elevated at 2.7 billion euros, figures on Friday showed. The central bank reinstated some of its most potent crisis-fighting tools earlier this month, including one-year liquidity injections, although the moves have done little to encourage banks to start lending to each other again.
Money markets are already well overstocked with ECB funds. Excess market liquidity stands at 215 billion euros, according to Reuters calculations. The ECB's liquidity is expected to keep the euro money market heavily over supplied with liquidity for the foreseeable future, maintaining downward pressure on interbank lending rates. At the ECB's latest offering of weekly loans, banks took 197 billion euros, down from 201 billion euros the previous week but in line with expectations.