Nov. 6 (Bloomberg) -- European borrowing costs fell as money markets remained awash with cash and investors speculated the region's central banks will cut interest rates further to revive lending.

The London interbank offered rate, or Libor, for three- month loans in dollars dropped 12 basis points to 2.39 percent today, the lowest level since November 2004, according to the British Bankers' Association. The comparable euro rate slid 6 basis points to 4.60 percent. The cost of overnight dollar loans rose less than 1 basis point to 0.33 percent.

``We are seeing policy makers around the world step up and do what is necessary,'' said Patrick Bennett, Asian currency and fixed-income strategist in Hong Kong at Societe Generale SA. ``We can be encouraged by that.''

Money rates have declined since central banks worldwide joined to flood the banking system with an unlimited supply of dollar funding and governments offered bailouts and guarantees to financial institutions. Policy makers in Japan, the U.S., Australia and China cut interest rates in the past two weeks.

The European Central Bank cut its main refinancing rate by a half-percentage point to 3.25 percent, while the Bank of England unexpectedly lowered its target 1.5 percentage point to 3 percent. Both central banks were expected to make half-point reductions, according to the median forecasts of economists surveyed by Bloomberg News.

The British central bank offered $10 billion in overnight funds today.

Deposits Drop

Banks' overnight deposits with the ECB fell from a record and borrowing slid to a six-week low at an auction. Financial institutions lodged 274.5 billion euros ($354 billion) in the central bank's deposit facility yesterday at 3.25 percent, down from 295.9 billion euros the day before. They also borrowed 3.5 billion euros from the ECB at the emergency overnight marginal rate of 4.25 percent, the lowest amount since Sept. 25.

While three-month dollar Libor has fallen for the past 19 days, it's still 139 basis points more than the Fed's target rate for overnight bank loans, compared with an average of 22 basis points in the five years before the global credit crisis began in August 2007.

The difference between Libor and the overnight indexed swap rate, a measure former Fed Chairman Alan Greenspan uses to gauge the state of money markets, narrowed 10 basis points to 184 basis points today. That compares with 87 basis points on the last day before Lehman Brother's Holdings Inc. collapsed on Sept. 15 and an average 11 basis points in the five years before the credit crisis started.

`Absolute Terms'

``Although Libors have been falling in absolute terms, they haven't really been falling much relative to bank rate expectations,'' said John Wraith, head of U.K. rates-product development at Royal Bank of Canada in London.

The cost of borrowing in Hong Kong dollars for three months, or Hibor, fell 11 basis points to a seven-week low of 2.44 percent today. The rate for U.S. dollar loans in Singapore, or Sibor, dropped to 2.42 percent, the lowest level since November 2004.

Libor, the benchmark for $360 trillion of financial products worldwide, is set by a panel of banks in a daily survey by the British Bankers' Association before noon in London.

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Lilian Karunungan in Singapore at lkarunungan@bloomberg.net

Last Updated: November 6, 2008 07:55 EST