Money markets short term euro rates to fall even if ecb holds fire

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* ECB seen in wait-and-see mode this month, may ease later* Abundant liquidity to drive short-term rates lower* ECB deposits hit record high, seen rising further* Bubill yield negative at auction as banks not trustedBy Marius ZahariaLONDON, Jan 9 Short-term euro zone interest rates are set to fall further in the near term due to a growing excess of cash in the banking system, even though the European Central Bank is unlikely to announce significant easing steps on Thursday. The ECB is seen remaining in wait-and-see mode to gather more data about the impact of its recent salvo of monetary easing measures. Analysts expect it to hold its key interest rate at 1 percent after two consecutive cuts late in 2011 and to hang fire on additional liquidity measures after it injected nearly half a trillion euros in three-year euro loans on Dec. 21. But economists and rate strategists expect the bank to ease monetary policy further in the near future to fight an economic downturn which could slow inflation too much and to help banks cope with almost frozen interbank lending markets.

"They would probably hint that the ... 1 percent level will not be the floor and this might be positive. We like Euribors," said Peter Schaffrick, head of European rates strategy at RBC Capital Markets. 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 on Monday to 1.276 percent, the lowest since early April and down from Friday's 1.288 percent. The equivalent Libor London interbank rate, also fell to 1.21729 percent from 1.22857 percent on Friday. Economists polled by Reuters expect the ECB to cut rates to 0.75 percent in February or March.

Forward overnight Eonia rates, which trade just a few basis points above the ECB's 0.25 percent deposit facility rate across the 2012 strip, have less room to fall, analysts say. A cut in the deposit facility rate is unlikely as it would ham the ECB's ability to sterilise its government bond purchases."Even if there is no impact on Eonia from a rate cut, the fact that the refi rate could be lowered will help the banking system because most of the funding is now driven by the ECB rate," BNP Paribas interest rate strategist Patrick Jacq said."Funding for banks is highly driven by the ECB."

ECB TAKES IT ALL Overnight deposits at the ECB climbed a new record high of 464 billion euros on Monday as banks preferred to park their cash with the central bank rather than lend to other banks. That is unlikely to change in the near term, especially as worries over the sovereign debt crisis and what impact it could have on banks are bound to intensify as Italy and Spain begin their tricky 2012 funding quest this week. In fact, deposits at the ECB could rise even further."Starting next week with the first reserve period of the year, reserve requirements will decline by more than 100 billion euros so excess liquidity will increase further and the use of the deposit facility will break the current record," Jacq said. Further highlighting the stress in interbank markets, data showed funding from the European Central Bank to Italian banks rose sharply to nearly 210 billion euros in December from 153.2 billion euros at the end of November. Money market investors outside the banking sector are avoiding banks, preferring to pay a fee to keep their cash in instruments deemed safer than bank deposits. Germany sold 3.9 billion euros of six-month treasury bills on Monday at a yield of minus 0.0122 percent.