MARKETS-MONEY (WRAPUP 2)
* Euro interbank rates steadying with liquidity ample
* Forward rates show uncertainty over the next ECB move
* Dollar Libor eases further after GDP data
By Kirsten Donovan
LONDON, Aug 2 (Reuters) - The interest rates banks charge each other for euros were broadly stable on Monday and traders said there remained little sign of the return to "normal" lending between banks craved by European policymakers.
Benchmark Euribor rates -- down for the first time since late April on Friday -- edged up to 0.898 percent but held below Thursday's peak, while equivalent euro Libor rates were fractionally lower at 0.83156 percent.
The Euribor rate, which underpins longer-term borrowing costs in the wider economy, has risen around 11 basis points since the European Central Bank a month ago withdrew a large chunk of the emergency cash it has provided to banks since 2008.
More borrowers have been trying to access the interbank market since the ECB took the step, but many lenders have remained unwilling to lend funds to other banks, putting upward pressure on three-month rates.
Overnight euro rates, however, fixed on Friday at 0.42 percent, down from around 0.55 percent in mid-July, due to the impact of monthly cash flows and the fact that some have now built up more liquidity since the ECB move.
"That level is more in line with the fundamental position in terms of where excess reserves are," said Nick Matthews, senior European economist at RBS.
"But where we go from here is largely dependent on what the ECB announce regarding the setup for liquidity in the fourth quarter."
TENSIONS
The mechanics of the interbank market, little-watched when banks are on a strong footing, have been looked at carefully by broader markets since a collapse of bank-to-bank lending prompted the financial crisis to explode two years ago.
Traders say that irrespective of what rates are doing, there is still very little longer-term interbank lending taking place -- showing that the market is still subject to substantial dislocation.
The three-month rate is also still unlikely to rise above one percent in the near term as that is the price at which banks will be able to obtain longer-term funds from the European Central Bank at its next tender in September.
"As long as we're below one percent, there's going to be some gravitational pull," said ICAP Economist Don Smith. "But the increase in liquidity we've seen in the last couple of weeks means the pace of increase is slowing markedly."
According to Royal Bank of Scotland analysts, forward rates show the market also expects the overnight lending rate to be at 0.67 percent in December and still under 90 basis points by the middle of next year.
That, Matthews says, suggests there is still some uncertainty as to when the ECB will normalise its liquidity provision.
The ECB has pledged to provide unlimited longer-term liquidity at least until September's tender of three-month funds, while unlimited one week and one-month funds will be available until October.
NO RETREAT
If the ECB takes no further steps, then liquidity provision could be normalised by the end of the year and Eonia should rise to around the ECB's refinancing rate, currently one percent -- something several analysts see as possible.
"Signs that the euro crisis is easing, given normalising risk premia in peripheral euro zone government debt markets and lower bank credit spreads, indicate the ECB will maintain its current stance," said Lena Komileva, head of G-7 economics at Tullett Prebon.
While there may be little change in liquidity conditions through to the end of September, the maturity of some 225 billion euros of 3-, 6-, and 12-month funds at the end of the third quarter will set the trajectory for euro zone rates to the end of the year.
Key will be how much banks roll into the three-month tender taking place at the same time, with a large take-up ensuring excess liquidity and lower rates through to the end of the year.
Meanwhile, the cost of borrowing dollars continue to fall after weaker than expected US GDP data on Friday raised hopes the Federal Reserve could become accommodative.
Three-month dollar Libor rates fixed almost a basis point lower at 0.44469 percent.
