Euro, pound Libor edge up

The interbank cost of borrowing euros edged up on Friday a day after the European Central Bank took a first step towards the exit from its crisis measures. The ECB on Thursday indicated it was comfortable with overnight lending rates remaining below its main refinancing rate for the time being but suggested its one-year loans to banks would not be repeated next year.
Benchmark sterling interbank rates also rose after the Bank of England said it would extend its quantitative easing programme by 25 billion pounds to 200 billion pounds, less than the 50 billion pounds some had been expecting. "The BoE has effectively shut out the possibility of even starting a countdown to rate hikes until at least (its) February meeting," said Morgan Stanley rate strategist Laurence Mutkin.
"There is more uncertainty around the ECB, but ...as long as (the ECB remains happy seeing EONIA continuing to trade below the refi rate) we'd argue that the countdown to rate hikes hasn't started in the euro area either." The ECB held its main refinancing rate at 1 percent on Thursday. The EONIA overnight rate, which has been depressed due to the large amount of excess liquidity in the banking system, earlier this week hit a record low of 0.324 percent.
ECB President Trichet suggested that December's tender of 12-month funds may be the last such operation, but analysts said excess liquidity would still remain in the system with funding available for those that needed it. "(It) is just passive exiting of a very generous programme," Societe Generale strategists said.
Three-month euro Libor rates nudged up to 0.67625 percent. The spread between the March 2010 and March 2011 Euribor contract has steepened to 136 basis points this week from 130 basis points as the market modestly raised its expectations of interest rate hikes to come. Three-month sterling Libor rates rose half a basis point to 0.60875 percent.
Although the BoE extended its asset-purchase programme on Thursday, some in the market had looked for a larger increase and the price reaction was one of disappointment. Longer-dated yields rose and the 2/10 yield spread, now at 300 basis points, is around 12 basis points steeper than before the BoE's announcement. Three-month dollar Libor rates marked a new record low at 0.27406 percent. Earlier this week the Federal Reserve reiterating that it expects to keep rates "exceptionally low" for a long time.