LONDON/FRANKFURT (Reuters) - Euro zone bank-to-bank lending rates hit new all-time lows on Monday after the European Central Bank eased monetary policy earlier this month and could ease further before stabilizing at a premium over overnight rates.
The ECB cut its main interest rate on July 5 to a record low of 0.75 percent and reduced the deposit rate it pays banks for parking money with it overnight to zero in an effort to breathe life into the flagging euro zone economy.
That has driven the short-term Euribor rates that banks publish for lending to each other to an all-time low, which in turn should encourage consumers and companies to borrow more at the lower rates.
But that fall for the moment looks academic given that nervousness over economic and systemic threats are still prompting banks in reality to keep vast quantities of their cash parked at the ECB.
The unprecedented cut in deposit rates to zero means institutions get no return on that cash but net that has made more difference to the amount of money parked at the ECB - much of it has just been shifted to a current account facility which also offers no interest.
That suggests that, at least initially, no-one in the sector has enough faith in public finances in the euro zone, its banking sector or the health of a reeling economy to risk lending more. Most analysts are skeptical that will change.
"It doesn't matter what rate it is, the banks aren't going to lend," one trader said. "Balance sheets haven't been restored and what's going on regarding Libor, more banks are going to get fined, that's a hit on their balance sheet as well."
Barclays Plc (BARC.L), the bank at the center of a scandal over the attempted manipulation of London's Libor system of setting interbank rates, was fined a record $450 million last month by U.S. and British authorities.
It is the only bank so far to admit any wrongdoing in giving false information as part of the complex process of setting Libor, but more than a dozen banks are expected to be drawn into the scandal, which is being probed by authorities in North America, Europe and Japan.
Three-month Euribor rates, traditionally the main gauge of bank-to-bank lending, hit a new all-time low of 0.477 percent on Monday, down from 0.486 percent on Friday.
The trader expected Euribor rates to stabilize around 0.30-0.35 percent, offering a premium over Eonia overnight rates which have also fallen steadily since the ECB rate cut.
Eonia rates were last at 0.12 percent, having fallen sharply after deposit facility rate - which serves as a floor for bank-to-bank overnight rates - was cut to zero. Forward contracts suggest those rates will only stabilize at around nine basis points.
"Expectations of low Eonia rates have become deeply entrenched. Eonia is now expected to rise above 75 basis points (0.75 percent)only after three years," Deutsche Bank said in a research note.
Richard McGuire, strategist at Rabobank, also does not expect the reduction in the deposit facility rate to spur bank lending in the current scenario.
"We are still flirting with recession in Europe and in the developed world and hence banks are reticent to lend against such a backdrop," McGuire said, explaining the reasons why banks are hoarding cash.
"Borrowers are also on the whole unwilling to borrow. Companies are cash rich because they are not investing, they are not investing for the same reasons banks aren't lending, they don't see a profitable investment opportunity, they are worried about the economic outlook."
Additional reporting by Frankfurt bureau, editing by Patrick Graham