Overnight interbank rates look set to fall on Wednesday as banks receive the extra cash they bid for at this week's ECB tender, but caution was likely to prevail as long as uncertainty surrounded Greece, analysts said. Banks asked for an additional 51 billion euros in one-week loans on Tuesday to cope with a tighter market for overnight funds.
In recent weeks, institutions had kept money at the European Central Bank rather than lending to each other. The extra liquidity should see Eonia fall at this evening's fixing after hitting its highest levels since early 2009 in mid-June at 1.55 percent and consistently fixing above the bank's 1.25 percent refinancing rate.
"Things should certainly be calming down in the coming days with the additional cash due to settle today, and thus overnight rates certainly have some room to move lower," said Christoph Rieger, rate strategist at Commerzbank in Frankfurt. Greece's government survived a confidence vote early on Wednesday meaning new austerity measures are likely to win political approval, triggering the release of aid funds needed to avert the threat of a default by mid-July.
Other measures of money market stress eased off levels seen late last week when fears surrounding Greece peaked. The cost of accessing dollar funding markets using one-year cross currency basis swaps was around 4.5 bps cheaper than levels seen on June 16. Nevertheless, Commerzbank said it stuck to its forecast for rates to rise in July and October, and saw room for the Eonia curve to adjust once Greece had passed its austerity budget and received the latest batch of bailout funding.
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