Sterling interbank borrowing costs slid for the ninth successive session on Thursday, tracking falls in dollar and euro fund costs, as lenders took the view that the Bank of England will keep policy rates low.
Three-month funds edged lower GBP3MFSR= to 0.72688 percent from 0.72744 percent the previous day.
All other sterling maturities from overnight to six months were unchanged at the fixings of the London Interbank Rate (Libor) this session.
Three-month sterling Libor had risen steadily to 0.74498 percent by Aug. 9 after marking a record low of 0.54 percent last September.
With the UK's central bank insisting a spate of inflation target overshoots was temporary, investors expect the bank to keep an accommodative monetary policy stance.
Indeed, right after the Federal Reserve on Aug. 10 downgraded U.S. growth expectations and said it would reinvest mortgage bonds proceeds in U.S. Treasuries, the Bank of England weighed in, saying it would leave all options open on monetary easing.
The U.S. Federal Reserve's decision to extend its quantitative easing programme, opening up the prospect for a second round of QE here in the UK, lay behind the move in sterling Libor, Christopher Clark, market strategist at ICAP in London, said. Lena Komileva, director of G7 Market Economics at Tullett Prebon, said sterling Libor had drifted lower on expectations of steady UK interest rates for longer and easing fears about a technical liquidity crisis in the euro zone as long as the European Union and European Central Bank backstop liquidity facilities remain in place.
The only danger is that added volatility in capital markets in September could mean Libor will be more unstable and could go up again, she said.
Notwithstanding that, analysts such as Giuseppe Maraffino, fixed income strategist at Barclays Capital in London, reckon that so long as major central banks agree to keep rates anchored low, sterling Libor will stay in line with the fall by other three-month Libor, such as the dollar and euro.
EONIA STAPLED, OVERNIGHT LOANS HALVE
The overnight euro zone funding gauge Eonia has continued to ease since the end of the monthly ECB maintenance period just over a week ago. Late on Wednesday it touched 44.0 percent EONIA=.
Maraffino said that this follows previous patterns and that he expects Eonia to tend to 30-35 percent by the end of August.
From the second half of the monthly maintenance period we would expect Eonia to fall anyway. But right now this is also dipping because banks expect the ECB to maintain full allotment at tenders in October and beyond. After the ECB's housekeeping meeting this session, Maraffino said investors should look out in the days ahead for possible comments by ECB officials about prospects for full allotment beyond September.
At present, 225 billion euros of maturing funds will be recalled by the ECB at the end of September. This is half the amount taken back at the end of June.
I am convinced the ECB will maintain the full allotment at its operations at least until the beginning of next year, in order to overcome the seasonal increase in demand for liquidity at the turn of the year, Maraffino said.
Analysts said the drop in overnight borrowing from the ECB showed normal money market functioning.
Overnight borrowing from the ECB more than halved on Thursday to 775 million euros, from a three-month high of 1.86 billion euros the previous day, ECB figures showed. (Editing by Hugh Lawson)