June 21, 2012 / 1:10 PM / 7 years ago

MONEY MARKETS-Euribor slips as ECB cut expectations grow

* Euribor, euro Libor both fall, seen sinking further

* ECB rate cut expectations stoked by Coeure comments

By William James

LONDON/FRANKFURT, June 21 (Reuters) - A growing conviction that the European Central Bank will cut interest rates pushed interbank borrowing costs lower on Thursday, with markets pricing in a slide to record lows.

Three-month Euribor rates, traditionally the main gauge of bank-to-bank lending and a proxy for the direction in which the ECB’s refinancing rate is headed, eased to 0.655 percent from 0.657 percent.

The interbank market is awash with cash injected by the ECB, depressing Euribor rates to within 2 basis points of their lows but analysts expect rate cut speculation to drive rates lower before the next policy meeting on July 5.

The euro zone’s struggling economy is putting additional stress on countries struggling with a debt crisis that currently threatens Spain’s ability to raise funds from the market and is piling pressure on the ECB to act.

“I can’t see the world changing sufficiently to derail market belief that the ECB will provide another cut,” said Eric Wand, strategist at Lloyds Bank in London.

“Put it this way, if the ECB stays where it is, the market would take it pretty badly. It seems like a cut is in the offing.”

The euro-denominated Euribor rates pushed lower after fresh hints from ECB policymakers that the bank’s deposit rate could be cut, a move that would open up room for a further drop in market rates. Banks will only lend in the open market if borrowers are prepared to pay more than the ECB.

ECB Executive Board member Benoit Coeure said on Wednesday in an interview with the Financial Times that rate cuts remained an option and would probably be discussed at the next meeting, but that any move would not be a cure-all.

Euribor futures edged higher with contracts dated out to the end of the year rising by around two ticks. Prices imply Euribor falling below the record of 63.4 bps by next month, reaching as low as 51 bps by December.

Three-month euro Libor, fixed by a smaller panel of banks based in London, also fell to set a new low at 0.56479 percent.

Technical analysis by Futurestechs showed the outlook for the March 2013 contract, currently trading at 98.465, was bullish and protected by solid support around 9 9 .34 - a rising trendline between recent lows.

Expectations of a cut to the ECB deposit rate - the amount of interest paid on cash parked overnight at the bank - were reflected in the market for fixed-term Eonia.

Lending at a fixed-term Eonia rate for anything longer than two months requires offering a price below the 25 basis points currently on offer at the ECB. The three-month Eonia rate was last at 21 bps.

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