Liquidity to keep market rates low after year-end

By Kirsten Donovan

LONDON (Reuters) - Ample cash in the system should see euro zone money markets run smoothly over year-end and lending rates stay low in the first half of 2010 after the European Central Bank's next offering of 1-year money.

Even a modest take-up of funds at the ECB's likely final 12-month open market operation in December will ensure no shortage of cash in the banking system until at least June.

That should keep overnight rates pinned near record lows and enable the interbank market to continue its slow improvement.

Interbank lending rates, such as Libor or Euribor, typically tick higher at the end of the year as banks seek cash to help present their balance sheet in the best possible light.

Euro zone banks are replete with ECB funds, and the system is carrying around 60 billion euros (38 billion pounds) more than the central bank deems necessary, most of it parked in its vaults overnight via the deposit facility.

Traders said one-week interbank rates which cover the year-end may be subject to a small premium with banks unwilling or unable to offer cash but they see no shortage of money.

"We've still got the deposit facility being used massively compared to historical year-end levels so there isn't going to be much of a squeeze," said Calyon rate strategist David Keeble.

And rates derived from overnight indexed swaps by BNP Paribas strategist Alessandro Tentori show only a small rise in rate expectations with OIS from the period December 28-30 at 0.42 percent and 0.57 percent from Dec 31-Jan 4.