LONDON, June 10 (Reuters) - A European Central Bank decision to extend fixed rate three-month liquidity operations until September could help reduce money market tensions and prolong lower EONIA and Euribor rates, analysts said on Thursday.
Speaking at a news conference after the ECB left its key policy rate unchanged at 1.0 percent, as expected, the central bank's president, Jean-Claude Trichet, said a further three operations in three-month liquidity would be conducted through to Sept. 29. [ID:nWEA5693]
Trichet also said the ECB's bond-buying of riskier euro zone debt would continue.
The overnight EONIA rate EONIA= fixed at 0.332 percent - barely changed from levels seen since July 2009. [ID:nLDE6381Q1]
The ECB introduced six- and 12-month liquidity operations during the financial crisis to help banks gain access to money and ensure credit kept flowing.
It started to phase out additional stimulus measures late last year, but has since reinstated some of them as the sovereign debt crisis has made banks hoard cash again.
But a question mark has been hanging over what would happen to liquidity conditions when the current 442 billion euros 12-month Long-Term Refinancing Operation expires on July 1.
Trichet's offer makes more readily available liquidity from the ECB, aiding the transition out of 12-month money into shorter tenors when the current 12-month LTRO ends, said Peter Chatwell, a market analyst at Credit Agricole in London.
This tonic to money markets was expected to arrest recently widening London Interbank Offered Rates over OIS rates, the three-month premium paid over anticipated central bank rates.
This will bring the Libor-OIS spread lower for the time being, as the market can now get access to unlimited three-month funds at a fixed rate until Sept. 29 at least, which should reduce counterparty risks and postpone any exit strategies the ECB might want to implement, he added.
September Euribor futures FEIU0 turned positive, pulling implied rates lower.
The monthly 3-month operations in the third quarter...will limit upside pressures on Euribor (rates) stemming from the expiration of the ECB's 12-month loans in July, said Lena Komileva, head of G7 market economics at Tullett Prebon in London.
However the rise in Euribor has been related to credit risk concerns, rather than to lack of ECB liquidity in the markets, so implications for the market are relatively limited.
Some analysts had expected any extension of liquidity to be in the six-month operations.
This new liquidity will mean that Eonia rates stay lower for longer and especially the market tensions could now be contained, said Benjamin Schroeder, money market analyst at Commerzbank in Frankfurt.
Before the ECB announced steady interest rates, the six-month euro-priced interbank lending rate climbed above the central bank's benchmark rate for the first time in seven months as market tensions put pressure on borrowing costs. [ID:nEAP000459]
Also before the ECB's announcement, euro Libor was fixed at 0.65438 percent in London, up slightly from 0.65250 percent a day earlier EUR3MFSR=. The Libor/OIS spread was unchanged at 23 basis points. [ID:nEAP000031]