Euro interbank lending rates rose on Friday after the European Central Bank indicated it could raise interest rates to contain inflation even while the region is gripped by a debt crisis. Eurozone inflation jumped last month to 2.2 percent, the first time in two years it has risen above the central bank's target of just below 2 percent.
ECB President Jean-Claude Trichet warned on Thursday that prices need to be monitored very closely and stressed that eurozone interest rates - currently at 1 percent - were set at levels to ensure price stability. Benchmark three-month euro Libor rates rose half a basis point to 0.93813 percent, two-year German bond yields rose to their highest since February 2010 and Euribor interest rate futures fell across the curve out to 2013, pushing implied rates higher.
Successful bond auctions by Spain and Portugal this week helped take the edge off fears they may need to seek financial aid, but their sovereign borrowing costs remain elevated and their banks highly dependent on ECB liquidity. "A rate rise is realistic if the politicians come up with a more comprehensive bailout mechanism than is in place right now," said Commerzbank rate strategist Christoph Rieger.
Market pricing shows a first ECB rate rise is expected by January 2012, compared with the end of the first quarter of 2012 a month ago, according to Commerzbank. Illustrating how reliant some countries' banks remain on the ECB, data on Friday showed Spanish banks' borrowing rose to 70 billion euros in December, while the Bank of Portugal said this week that Portuguese banks had increased their borrowing by around 8 percent.
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