By William James
LONDON, July 30 (Reuters) - Key euro interbank lending rates
dipped on Friday, stalling a long-term rise, as the cost of
borrowing in the money market has become gradually less
attractive relative to funding from the European Central Bank.
Interbank rates have been rising as markets look ahead to
the withdrawal of unlimited ECB funds, which were pumped into
the banking system after the 2008 collapse of Lehman Brothers
made banks wary of lending to each other.
Friday's dip did not represent a fundamental change to the
overall trend of higher bank-to-bank lending rates, which
analysts see rising above the European Central Bank's 1 percent
refinancing rate by the end of the year.
'This will be indicative of the coming months, in the sense
that the sharp rise in money market rates is coming to an end
and we're switching to a more slow-moving trajectory,' said
Elwin De Groot, senior market economist at Rabobank in Utrecht.
Overnight lending rates, which underpin longer-term
borrowing costs in money markets and the wider economy, also
eased, relieving pressure on benchmark euro Libor and Euribor
fixings.
Three-month Euribor fell for the first time
since mid-April to 0.896 percent and equivalent euro Libor fixed a fraction lower at 0.83250 percent after
rising for 11 consecutive sessions.
After the fixing, investors moved quickly to price in lower
rates into next year as Euribor futures rallied around
3 basis points across the curve.
The cost of interbank borrowing has been artificially
surpressed by the flood of cheap funding pumped into the euro
zone banking system to keep money markets liquid.
But the prospect of an end to the unlimited, fixed-rate ECB
loans, scheduled to be phased out by the end of the year, has
led market participants to start competing for funds in the
interbank market, driving costs higher.
Daily fixings of euro Libor and Euribor take an average of
where a panel of banks believe they can obtain funding in the
market, but the cost of borrowing for institutions where risks
are seen as higher is often above this indicative rate.
Among the 16 banks on the Libor panel, euro three-month
rates ranged on Friday from 0.902 percent for WestLB to 0.715
percent for UBS.
Although both Euribor and euro Libor are currently between
0.8 and 0.9 percent, loans from the ECB at 1 percent become
attractive to a growing number of banks as rates rise, slowing
the overall move.
This dynamic, analysts said, explains why the rise in both
euro Libor and Euribor has slowed in recent sessions, adding
that the slight dip at the latest fixing was seen as a minor
fluctuation.
OVERNIGHT EASING
The marginal increase in bank reliance on the ECB was
evident in the outcome of this week's regular tenders.
Banks opted to expand their borrowing from the central bank,
raising excess liquidity in the system by more than 7 billion
euros.
This increased take-up of funds has relieved the immediate
upward pressure on overnight rates.
Eonia -- a weighted average of all overnight unsecured
bank-to-bank lending transactions -- has fallen by more than
four basis points over the week to 0.453 percent, helped by
banks freeing up liquidity throughout the ECB's maintenance
period.
However, market participants reiterated that Eonia
should still be topping 1 percent by the end of the year,
provided the ECB does not extend access to unlimited funding.
'Overall this does not change the pattern of normalisation,
If the ECB proceeds as pledged... we see Eonia by year-end at
normal market levels -- a few basis points above the refinancing
rate,' said Matteo Regesta, strategist at BNP Paribas.
Keywords: MARKETS MONEY
(william.james@thomsonreuters.com; +44 207 542 3374; RM: william.james.thomsonreuters.com@reuters.net, editing by Nigel Stephenson)
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