Key euro-priced interbank rates edged up on Monday, reflecting expectations the European Central Bank will hike rates as early as end-2011 but a pickup in excess cash in the system could slow the upward march in the interim.
Bank-to-bank borrowing costs in the euro area have been rising for the past week since ECB President Jean-Claude Trichet warned on January 13 that the single currency bloc faced short-term inflation pressures.
That led financial markets to raise bets the bank would raise interest rates sooner than initially thought, with the market now pricing in a 25 basis point rate hike by the end of 2011 rather than the first quarter of 2012.
The benchmark London interbank offered rate for three-month euros inched up to 0.96625 percent from 0.96188 percent on Friday. The equivalent Euribor rate - traditionally the main gauge of unsecured interbank euro lending and set by wider panel of European banks than Libor - rose to 1.029 percent from 1.025 percent. The overnight EONIA rose to 0.84 percent on Friday.
The rise in short-term money market rates could lead to more demand at the ECB's three-month tender this week as banks seek to secure longer-maturity loans at a more attractive rate than what the market offered, some market participants said.
Demand above 50 billion euros would lift excess liquidity in the eurosystem by around 10 billion euros, according to Jaq, putting downward pressure on the key overnight Eonia rate and steepening the short-term money market curve. There is currently just over 24 billion euros of excess liquidity in eurozone money markets, according to Reuters calculations. The amount has dropped back since the start of the year as banks have begun to rejig their funding after a typically tense year-end.
Three-month loans are once again the longest maturity on offer and banks have now paid back all the six-month and 12-month loans the ECB injected during the turmoil.
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