December 5, 2008 / 1:18 PM / 11 years ago

MONEY MARKETS-Libor rates, spreads fall after moves

* Libor 3-mth rates, spreads fall following cuts

* Sterling Libor/OIS spread collapses by 50 bps

* Overnight deposits at ECB still top 200 bln euros

(Updates with Libor fixing, adds comment and quotes, changes byline and dateline. Previous: SINGAPORE)

By Jamie McGeever

LONDON, Dec 5 (Reuters) - The bank-to-bank cost of lending three-month money fell on Friday following several deep interest rate cuts around the world the previous day and the premium paid for unsecured funds, particularly sterling, also fell.

A day after the central banks of the euro zone, Britain, Sweden and New Zealand slashed borrowing costs by between 75 and 175 basis points, money market tensions eased.

Three-month euro London interbank offered rates fell for the 42nd consecutive session, the euro Libor spread over anticipated policy rates was its narrowest for two months and the sterling Libor/OIS spread got crushed by around 50 basis points.

But analysts pointed out that the shrinking gap between Libor and Overnight Index Swap rates — a sign of easing money market strains — was in a large part due to disappointment among investors over the UK and euro zone rate cuts.

Some investors interpreted comments from European Central Bank President Jean-Claude Trichet as a sign the bank may pause its rate easing cycle, while three-month sterling OIS edged up after the Bank of England’s percentage point cut didn’t meet the more dovish bets in the market for a deeper cut.

Anxiety over banks’ year-end funding needs means banks are more prone to keeping cash on their books for year-end accounting purposes rather than lend.

ECB data showed that euro zone financial institutions once again opted to deposit well over 200 billion euros at the central bank overnight.

“While rate cuts can’t fix the problem at the heart of this crisis ... monetary policy plays a crucial role in the current environment as a confidence stabilizer and a liquidity provider,” said Lena Komileva, head of G7 Market Economics at Tullett Prebon.

“The impact on OIS rates from this month’s less dovish ECB and BoE communication drains liquidity and generates a great deal of uncertainty at a time when the market badly needs visibility and the ability to rely on a credible policy framework. This all but destroys any chance of a year-end risk rally.”

On Friday the three-month sterling Libor/OIS spread shrank by 52 basis points to 202 basis points. Earlier this week the spread hit its highest level of the entire crisis, barring a brief spike to 300 basis points on the day the BoE stunned markets with its 150 basis point rate cut last month.

Three-month euro Libor had its biggest fall since the ECB last cut rates in November, and has now fallen every day since October 8.

The euro Libor/OIS spread narrowed a decent amount too, to 152 basis points. The Libor/OIS spread is seen as a gauge of banks’ willingness to lend to each other — a narrowing spread indicates increased inclination to lend.

Libor rates are only indicative prices of where banks are lending to each other, which institutions use as a base to set their own lending rates.

Francis Yared, rates strategist at Deutsche Bank, welcomed the central bank action on Thursday but said there’s unlikely to be a major tightening in spreads because three-month EONIA rates are still well below the ECB’s 2 percent refi rate.

This could put a dampener on how much banks lend out to mortgage holders, consumers, companies or each other.

“It’s not going to be massive,” he said.

British Prime Minister Gordon Brown on Friday urged banks to pass on the BoE’s rate cut to help homeowners hit by the worst economic turmoil in decades.

“We are taking action to try and get that (Libor) down. Banks should really pass on the interest rate cuts,” he told GMTV.

“We will be talking to the banks again.”

For more on the British Bankers’ Association’s Libor fixings on Friday, see [nL535478].

Earlier on Friday, ECB data showed European banks deposited 236.67 billion euros at the ECB overnight as of Dec. 4, up from 231.68 billion euros reported on Thursday.

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