Euro interbank rates climb

Euro interbank rates rose on Thursday ahead of a European Central Bank monthly meeting where any fresh signals over its inflation outlook were seen likely to trigger fresh repricing of interest rate hike expectations. Last month markets brought forward their expectations of when interest rates would rise after ECB President Jean-Claude Trichet was judged to have sounded more hawkish on inflation.
However with rate hikes not seen imminent, there was little reaction offer Thursday's meeting when the central bank kept rates on hold at a record low 1 percent. In the three weeks since the January 13 meeting rate-sensitive Euribor futures have tumbled, German Schatz yields have risen around half a percentage point and demand for inflation-linked bonds has grown as data in the eurozone and across global markets has confirmed rising prices.
As a result, investor focus was concentrated whether fresh clues on when rates could begin to rise would emerge at a Trichet news conference scheduled to begin at 1330 GMT. "Right now the market is quite divided on whether we are already at the crossroads of if we are going to see an ECB rate hike or not," said Christoph Rieger, strategist at Commerzbank in Frankfurt.
Interest rate futures imply that a 25 basis point rate increase is fully priced in for the ECB's August meeting, with a 76 percent probability that a hike could come as early as the July 7 meeting. Euro-denominated interbank rates have soared on the back of interest rate expectations. Three month Euribor climbed to 1.087 percent, having risen every day since the ECB's last meeting. The equivalent Libor rate rose to 1.0325 percent, its highest since July 2009.
However with only a short time since the ECB council last met, in which rising oil prices have been offset by a strengthening euro, analysts saw only limited potential for Trichet to step up his hawkish tone. "Given the fact that the market is discounting two rate hikes by the end of the year I don't think there's a major, major risk to the current levels from what he said three weeks ago the environment did not change that much," said Patrick Jacq, rate strategist at BNP Paribas.
A neutral tone from the bank, with little or no change to the language used, could even see some relief for short-end rates as investors unwind positions taken to hedge against the risk of increasingly hawkish statement, analysts said.