Eurobor rate falls to record low

REUTERS

The main reference interest rate in the eurozone, the three-month Euribor, fell to a record low level of 0.549 percent on Friday, down sharply from 0.641 percent a day earlier.

The former record for the Euro Interbank Offered Rate of 0.634

percent dated from March 31, 2010.

The Euribor reflects the terms on which European banks are prepared to lend funds to each other. It has fallen steadily since the European Central Bank began refinancing banks for up to three years at the end of December.

Trading volumes on the interbank market are weak at the moment however, for several reasons.

One is that banks are wary of lending to other banks located in eurozone countries that currently face financial problems.

Another is that in early 2013, banks will have to hold higher levels of core capital reserves to protect against costly failures to taxpayers under the terms of the Basel III regulations.

They have caused commercial banks to curb interbank lending and either hold on to surplus cash or place it in safe-haven instruments like German 10-year bonds or US Treasury notes.

The fall in the three-month Euribor followed a cut on Thursday by the European Central Bank in its main refinancing rate to a record low of 0.75 percent from 1.0 percent previously.

At the same time, the ECB lowered its overnight deposit rate, what commercial banks earn if they place money with the central bank overnight, from 0.25 percent to zero.

BNP Paribas bond trader Patrick Jacq said the drop in the Euribor arose in large part from the decline in the ECB's overnight rate, “because we are in a situation of very strong liquidities for the banks.”

In a bid to boost economic activity, the ECB has carried out two long-term refinancing operations (LTROs) that involved pumping more than one trillion euros ($1.24 trillion) into the eurozone banking system.

That money has not filtered down to the wider economy however.

Jacq forecast that the Euribor might fall by another 10 basis points, or 0.1 percentage point.

He did not think it would have a significant effect on the level of lending between banks however.

“We will have the same lack of volume, but at lower rates,” the trader said. -Sapa-AFP