Tuesday December 2, 02:56 PM
MONEY MARKETS-Interbank rates ease, sterling spread widens
By George Matlock
LONDON, Dec 2 (Reuters) - The interbank cost of borrowing
dollar, euro and sterling funds eased out to 12-month money on
Tuesday, while a sterling spread gauge widened sharply on
growing expectations of an aggressive UK rate cut this week.
Overnight to 12-month money rates saw a one-to-eight basis
points fall for borrowing in the three currencies, according to
the latest fixings from the British Bankers' Association.
The spread of three-month London interbank offered rates
over OIS rates for sterling widened by 11 basis points to 242
basis points, the euro spread narrowed by two basis points and
the dollar three widened by two basis points.
Dollar Libor and spreads have been elevated in the past
couple of weeks, despite evidence banks in Britain and in the
United States were able to raise more funds under government
guarantees and after U.S. primary dealers and commercial banks
increased borrowing from the Fed's special windows for money
market funds and commercial paper.
The sterling/OIS spread would have been a record wide,
except that it spiked sharply, hitting 301 basis points, on Nov.
6 -- the day the Bank of England cut UK interest rates by a
surprisingly aggressive 150 basis points to 3.0 percent.
'With the Bank of England having taken us by surprise with
150 basis points cut in November when markets expected just a 50
bps rate cut, this suggests markets are trying to pre-empt the
Thursday rate decision in case rates are again cut
aggressively,' Orlando Green, fixed income strategist, at Calyon
in London.
'There is anyway a realisation the UK's economic problems
could be worse than Europe's, as there is not only a rise in
public debt and a weaker housing market, but also a lot of
personal debt out there which is hitting consumption,' he added.
A snap poll of economists conducted by Reuters following
Monday's report of the worst UK factory activity slump since at
least 1992, suggested the majority of respondents now expect a
100 bps rate cut from the BoE to 2.0 percent on Thursday.
'It could even be more than that,' said one trader in
London. 'It could be 150 basis points and that is reflected in
the way the sterling spread went this morning,' he added.
The comparable dollar spread over OIS widened a couple of
basis points and the euro spread narrowed by 2 basis points.
The spread expresses the three-month premium paid over
anticipated central bank rates, or Overnight Index Swap rates
and is seen as a gauge of banks' willingness to lend to each
other -- a wider spread is seen as an indication of decreased
inclination to lend.
The view of economists on the UK differed to that for the
euro zone, where the European Central Bank will determine
interest rates 45 minutes after the BoE on Thursday.
Economists still expect the ECB to cut by 50 basis points,
although the market is pricing in 75 basis points cut to 2.5
percent, according to Eonia rates.
There was a fair amount of central bank activity in Europe.
The BoE said on Tuesday it received bids worth just over
two-thirds of the 20 billion pounds on offer at its three-month
money auction.
The BoE also said it allotted $11.24 billion in its
unlimited three-month dollar auction.
Overnight deposits at the ECB declined to 202.448 billion
euros, figures showed on Tuesday, but remained at an elevated
level as banks continued to hoard cash rather than lend it in
interbank markets.
The ECB lent commercial banks 339.520 billion euros at its
regular weekly tender of 7-day funds, at a flat rate of 3.25
percent.
The ECB also added a total of $68.941 billion in U.S. dollar
liquidity, via an FX swap and its latest offering of dollar
loans. The ECB added $67.466 billion via a 84-day tender and
banks changed up euros for $1.475 billion in a parallel FX swap.
Euribor euro bank-to-bank lending rates drifted lower on
Tuesday, with the key three-month rate hitting a new 22-month
low.
Keywords: MARKETS INTERBANK
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