December 22, 2008 / 1:25 PM / 10 years ago

MONEY MARKETS-Interbank dollar rates ease again

* Three-month dollar Libor rates extend fall

* Ireland pours $7.7 bln into 3 main banks

* China cuts interest rates again

(Updates with Libor fixings, changes byline, pvs HONG KONG)

By Ian Chua

LONDON, Dec 22 (Reuters) - The cost of borrowing dollar funds between banks mostly fell on Monday, extending the recent decline following the U.S. Federal Reserve’s aggressive interest rate cut to as low as zero a week ago.

The three-month dollar London interbank offered rate (Libor) was fixed at around 1.47 percent, the lowest since mid-2004, while the spread over anticipated central bank rates, or Overnight Index Swap (OIS) rate — a gauge of money market stress — also contracted slightly. ((See [ID:nLM572638]))

“The response to the Fed action last week was quite positive, we’ve seen quite significant improvements in Libor rates and even Libor/OIS spread, so that’ll continue at a gradual pace,” said Nick Stamenkovic, strategist at RIA Capital Markets in Edinburgh.

Hot on the heels of rate cuts in the United States and Japan, China lowered its interest rates for the fifth time since mid-September on Monday. ((See [ID:nPEK312116]))

December is usually a difficult month for the interbank money market even in normal times as banks tend to hoard cash and cut back lending to boost their balance sheets.

But Libor rates have generally been well behaved this month, thanks to measures taken by governments and central banks aimed at helping the sector weather a global credit crunch.

“In a normal year, you would see an end-of-year panic for dollars. But with the actions of the Fed in the past few months, if anything there is going to be an abundance of U.S. dollars,” said a senior money market trader at a European bank in Singapore.

Bank-to-bank lending rates have been trending lower since hitting peaks in October following the collapse of high profile names such as Lehman Brothers, but banks are still very wary of lending to each other.

These rates are only indicative prices of where financial institutions are lending to each other. Traders have said the actual cost of borrowing is likely to be higher and banks have been very selective as to who they lend to.

“Bottom line is, banks themselves are not lending to each other and until we see the problems in their balance sheets coming to an end, house prices particularly in the U.S. start to stabilise, this problem will persist,” Stamenkovic added.

Indeed, recent news continued to highlight the difficult conditions in the global banking sector that would do little to boost confidence between banks.

U.S. financial firms Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N) both reported quarterly losses just last week, while the Irish government was forced to bail out three of the country’s main lenders, injecting about $7.7 billion.

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