Credit Market Analysis by Lloyds TSB

Euro interbank rates have fallen below sterling, but pressures to adopt unconventional measures at the ECB rise

Euro interbank rates have fallen below sterling, but pressures to adopt unconventional measures at the ECB rise

Euro libor falls below sterling, despite higher official interest rates

UK official interest rates fell below euro rates for the first time last November and are currently at an all-time low of 1%. The ECB has also reduced rates, though more gradually and the main refi rate is currently at 2%. Yet, interbank rates in the euro zone remain below their sterling counterparts, see charts a and b. This also implies that the spread between 3m libor and OIS is narrower in the euro zone than in the UK. Why might this be? Lower euro interbank rates are likely to reflect the ECB’s provision of unlimited liquidity to the financial system through its fixed rate tenders since last October. The range of collateral has also been increased and includes instruments created specifically to be swapped for ECB funds. The result was to push the euro overnight rate significantly below the official ECB refi rate towards the lower deposit rate (which is currently at 1%), as chart c shows. In contrast, sterling overnight rates remain close to the
Bank rate, see chart d. The reason is that the UK has not increased liquidity in the manner of the ECB.

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