MONEY MARKETS-Stg rates mark new lows after BoE's QE surprise

* Benchmark sterling rates mark new low after BoE move

* Euro rates resume descent after ECB, hit new low

* U.S. commercial paper issuance rises, eyes turn to Fed

By Kirsten Donovan

LONDON, Aug 7 (Reuters) - Benchmark sterling interbank
lending rates marked a new record low on Friday, a day after the
Bank of England surprised markets with a 50 billion pound
increase in its quantitative easing program.
The Bank of England on Thursday held its main interest rates
at 0.5 percent but upped its QE program to 175 billion sterling,
causing gilts and short sterling interest rate futures <0#FSS:>
to rally sharply, lowering their implied yields.

Three-month sterling Libor rates GBP3MFSR= dropped a basis
point to 0.85500 percent on Friday [ID:nL7137426].

"Clearly (the BoE's move) still indirectly points to more
downward pressure on sterling Libor," said BNP Paribas rate
strategist Matteo Regesta.

The BoE's move however did little to change longer-term rate
expectations.

A Reuters poll suggests the bank will now cap its QE
programme at the 175 billion pounds and official interest rates
are not expected to rise until the second half of 2010, an
unchanged view from a poll a week earlier [ID:nL6270598].

"Both (the BoE and European Central Bank) are taking a very
cautious view of the recent improvement in activity indicators
and are not at all willing to risk a premature withdrawal of
policy stimulus," said Marco Annunziata, chief economist at
UniCredit Group.

And markets still anticipate that the BoE will have to raise
rates rapidly when it comes to exiting its current round of
easing.

One-year forward one-year OIS rates, which express
expectations for the average policy rate during the year
starting in one year's time are around 3.0 percent, but down
from around 3.4 percent before the BoE's announcement
GBPSB6L1YF1Y=.

Three month euro Libor rates EUR3MFSR= fell a fifth of a
basis point to a new low of 0.83938 percent after the Eurpean
Central Bank took a wait-and-see stance, leaving policy
unchanged and rates at a record low 1 percent on Thursday. The
Libor rate had inched higher the previous session for the first
time in two months.

The bank has another month to decide how it will conduct its
next tender of 12-month funds in September after banks scrambled
for nearly half a trillion euros of such money in June.

Much of that was still finding its way back to the central
bank's vaults, with overnight deposits rising slightly into the
end of the reserve period [ID:nFAT006761], keeping overnight
rates EONIA= pinned near record lows.

Next week sees over 163 billion euros of 1-week, 1-, 3- and
6-month funding maturing and markets will be watching to see how
much of this is rolled over as an indication to how much banks
are reducing their reliance on short-term liquidity.

FED NEXT
Focus now falls on next week's Federal Reserve policy
meeting where expectations are that the central bank will also
stick with its easy monetary stand.
Ahead of that, the U.S. commercial paper market -- a key
source of short-term funds for companies -- showed signs of
life, posting its first weekly growth in four months.

Higher activity for this type of short-term credits signaled
demand for businesses to replenish their inventories, which some
analysts see as a sign of an economic turnaround
[ID:nN06321784].

Three-month dollar Libor rates USD3MFSR= were down a third
of a basis point at 0.46125 percent.

Elsewhere, Aussie bond and interbank futures got a respite
from their recent sell-off spurred by growing expectations of
rates being raised sooner rather than later.

Implied money market rates CSRBA1Y=CSAU showed the market
expects at least 160 basis points of policy tightening over the
next 12 months, even though the Reserve Bank of Australia's
quarterly monetary policy statement on Friday reiterated that
the current low level of rates was appropriate for now.