MONEY MARKETS-Euro Libor at standstill ahead of ECB

* ECB liquidity extensions well-trailed

* Euro Libor at standstill while dollar Libor falls

By George Matlock

LONDON, Aug 31 (BestGrowthStock) – The interbank cost of three-month
euro funds was virtually unchanged in August, in contrast to
falling dollar rates, as investors anticipate the European
Central Bank will extend cheap liquidity into 2011.

The three-month euro London Interbank rate was fixed at
0.83000 percent on Tuesday, the same as on Monday (EUR3MFSR=: )
and barely changed from July’s final fixing of 0.83250 percent.
[ID:nEAP000041]

The ECB is expected to say after its monthly meeting on
Thursday that it will to continue to lend banks unlimited
shorter-term cash into next year. [ID:nLDE6420RY]

“Barring any surprise in the statement, we do not see the
ECB’s announcements as having a relevant effect on market
rates,” Giuseppe Maraffino, a strategist at Barclays Capital in
London, said.

In sharp contrast, three-month dollar Libor has made a big
downward move (USD3MFSR=: ), to 0.29563 percent on Tuesday from
0.45375 percent a month ago. It was near record lows of around
0.24 percent seen earlier in the year.

On Friday, Federal Reserve Chairman Ben Bernanke delivered
his much-awaited Jackson Hole speech with a promise to act if
needed to spur the economy.

“The euro Libor is so different to the (three-month) U.S.
Libor which has come off sharply this month as markets still try
to guess what the Federal Reserve might do to revitalise a
slowing economy and when,” a dealer in London said.

The euro zone’s central bank is widely expected to leave
interest rates on hold at an historic low of 1.0 percent on
Thursday and to extend its offer of unlimited cash at its main
weekly refinancing operations and three-month operations into
early 2011.

“We expect the ECB to leave the terms of the refinancing
operations unchanged until mid-January 2011,” Thomas Kobel,
economist at SEB in Stockholm, said.

Europe’s banks accepted lower returns from the ECB on their
cash on Tuesday, as a seven-day tender to finance the ECB’s 61
billion euros bond-buying operation was conducted.
[ID:nLDE67U1FO]

Even if the three-month overnight Eonia forward rate spread
has tightened in the past few days to 36.8 basis points, “the
easing is likely a reflection of Bernanke’s comments last
Friday. We are not too far off current spot prices, suggesting
the market does not foresee any major shocks from the ECB this
Thursday,” Christopher Clark, a strategist at ICAP, said.

This week’s move by the Bank of Japan to ease monetary
policy to provide cheap fixed-rate loans to the banking system
helped push the yen interbank rate lower but analysts said it
was unlikely to stimulate demand for credit. [ID:nTOE67U05L]

ECB FACES TWO-TIER ECONOMY

While the German economy grew at its fastest rate in the
second quarter since the country’s reunification in 1990,
peripheral sovereigns face poor growth rates and austerity
measures to combat ballooning budget deficits.

In turn, many Spanish, Greek, Portuguese and Irish banks
continue to face problems funding themselves and rely on ECB
liquidity, SEB’s Kobel said.

Irish banks’ borrowings from the ECB slipped to 89.5 billion
euros in July from 94.79 billion in June, data from the euro
zone’s central bank showed, but remained heady. [ID:nDUB00112]

But some strategists reckon banks may find it easier to
manage their money needs after 10-year German swap rates hit a
record low of 2.2750 percent earlier (EURAB6E10Y=: ).

“Low swap rates are good for primary market issuance in
longer maturities which allows banks to extend the duration of
their liabilities and reduce reliance on money markets,” said
Lena Komileva, director of G7 economics at Tullett Prebon.

(Editing by Ruth Pitchford)

MONEY MARKETS-Euro Libor at standstill ahead of ECB