Key Euribor bank-to-bank lending rates held steady for a third day running on Friday, shoring up support as a year-long downtrend under the weight of excess liquidity in money markets fades. Bank-to-bank lending rates have fallen sharply since last November when European Central Bank plans emerged to flood the banking system with ultra-cheap, three-year cash.
But the impact of the excess liquidity has now been largely priced in and there is uncertainty about whether the ECB will cut interest rates further, helping keep rates steady. Three-month Euribor rates, traditionally the main gauge of unsecured bank-to-bank lending, were unchanged on Friday at 0.190 percent. The six-month rate was also unchanged at 0.351 percent and the one-week rate held steady at 0.077 percent. The overnight Eonia rate dipped to 0.071 percent from 0.072 percent.
Dollar-priced bank-to-bank Euribor lending rates were mixed, with three-month rates falling to 0.60385 percent from 0.60462 percent and one-week rates rising 0.35154 percent from 0.35000 percent. The ECB's decision in July to stop paying interest on overnight deposits paved the way for further declines in euro-denominated rates by removing the 0.25 percent floor for the money market. The amount of excess cash in the euro zone banking system is still extremely high at 635 billion euros, according to Reuters calculations.
With that figure set to remain high for the foreseeable future, money market experts have focused on whether the ECB could copy Denmark's example and start charging banks to deposit cash overnight. Policymakers showed initial interest in the idea but some have since expressed reservations. Governing Council member Ewald Nowotny said last month a negative deposit rate was not realistic.