Money markets interbank rates dip as ecb cash fest looms

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* Euro interbank rates at 1-year low as tender looms * Feb. 29 last of ECB's 3-year cash injections, for now * Three-month dollar Libor lowest since mid-November By Chris Reese and Emelia Sithole-Matarise NEW YORK/LONDON, Feb 17 Bank-to-bank euro lending rates fell to fresh one-year lows on Friday hit by anticipation ahead of another huge injection of ECB long-term funds into the money market at the end of this month that some traders also bet will boost interbank lending. Having pushed excess liquidity to record levels with the nearly half a trillion euros in three-year funds it pumped into the system in December, the European Central Bank will give banks a second chance to grab ultra-cheap loans on Feb. 29. The ECB liquidity injections, with help from an extension of foreign financial swap lines by the U.S. Federal Reserve, were seen as the driving forces behind the lower interbank lending rates. Interbank rates have dropped by almost a third since the ECB announced plans to lend banks three-year money at rock-bottom rates in long-term refinancing operations. "The LTRO that the ECB has done has made really good progress in trying to ease some of the liquidity strains that were present in Europe," said Thomas Simons, money market economist at Jefferies & Co in New York, adding "it makes sense that the interbank rates would come down." The liquidity rush has headed off a credit crunch and prompted some thawing in interbank activity, although that remains name-specific, with the lingering risk of a disorderly Greek default keeping market participants cautious. "The next LTRO should, especially if it's a large take-up, encourage more lending as lenders will know that the counterparties are adequately liquid," said Kevin Pearce, senior broker at ICAP in London. "Of course a definite resolution to the Greek situation would help. But even now when it looks likely to be sorted, we've seen it go wrong so many times no one is yet convinced." With banks already awash with long-term cash and expectations of demand at the next round matching or even exceeding December's demand, downward pressure on lending rates in the money market continues. 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, fell to 1.036 percent from 1.041 percent, hitting the lowest level since January last year. Equivalent London interbank offered rates, set by a smaller panel of banks than Euribor, fixed lower at 0.96536 percent from 0.96821 percent. For latest Libor fixings see Rates in other maturities also dropped. Six-month rates fell to 1.334 percent from 1.339 percent, while 1onger-term 12-month rates dropped to 1.664 percent from 1.669 percent. One-week rates, the most heavily influenced by excess liquidity, which currently stands at a massive 485 billion euros according to Reuters calculations, eased to 0.368 percent from 0.371 percent. Overnight rates fixed at 0.371 percent for the third day running with market participants seeing a gradual decline in the fixings to a trough of 0.33 percent by July/August. Three-month dollar-denominated Libor on Friday fixed at 0.4931 percent, unchanged from Thursday at the lowest since mid-November. ECB shorter-term lending operations have shown banks are beginning to position themselves for the second handout of ultra-cheap three-year cash. Banks more than halved their intake of one-month loans but stocked up on short-term one-week funding, money they can easily flip into the three-year operation. "The repo markets are better and there's enough liquidity for term (funding) in ECB eligible paper and peripheral government bonds," a money market trader said. "The question is whether that will get distributed further to the economy. The ECB were quite clear about getting some of this liquidity to the smaller to medium-sized banks so that may work," he said.