Euro rates higher

Interbank euro lending rates nudged higher on Wednesday as banks increased their demand for cash at the beginning of the new European Central Bank reserve maintenance period, pushing up overnight borrowing costs. The cost of funding jumped higher after banks repaid around 80 billion euros to the ECB at the end of September, although that still left excess liquidity in the banking system at around 45 billion euros.
Warnings from ECB Governing Council heavyweight Axel Weber late on Tuesday, along with weekend tweaks to the central bank's collateral rules, served to remind markets that banks are ultimately expected to stand on their own feet. Weber said the ECB's programme to stimulate the economy by buying government bonds had not worked and should be scrapped and also called for the bank to scale back its other forms of support as soon as possible.
His comments came after the ECB made changes to its legal framework, underscoring its power to limit individual banks' borrowing at ECB lending operations amid ongoing discussion about how to tackle the dependency of some institutions on central bank funding.
"These new measures go in the direction to reduce the use of ECB liquidity," said Barclays Capital rate strategist Giuseppe Maraffino. Overnight deposits at the ECB dropped to 44 billion euros from more than 100 billion the day before as the new ECB maintenance period began. Overnight funds were changing hands at between 0.60 and 0.70 percent, traders said, depending on the perceived "quality" of the borrower.
That means the overnight Eonia rate is currently seen fixing around the top of end of that range as banks, seeking to "frontload" their reserve requirements, bid more aggressively in the interbank market given the lower liquidity environment.
The rate fixed higher at 0.762 percent on Tuesday, but that was due to the regular ECB cash drain from the system overnight at the end of the previous maintenance period. Prior to that it had been around 0.40 percent. Two- and three-week Eonia rates at 0.71 and 0.68 percent, indicate however that the overnight rate is currently seen falling only slightly from current levels. "I think we'll be at these levels for a while," said a trader.
Benchmark euro Libor rates edged up to 0.92200 percent, while equivalent Euribor rates closed in on the ECB's 1 percent refinancing rate, setting at 0.985 percent. Benchmark dollar Libor rates held at their lowest since late March after minutes from the US Federal Reserve's latest meeting showed officials thought the struggling economic recovery might soon need more help, paving the way for another round of quantitative easing.