Overnight rate seen lower

Overnight eurozone interbank rates are set to drift lower as banks are expected to bid strongly for three-month ECB cash on Wednesday, despite rising rate hike bets, thus keeping liquidity conditions comfortable. The European Central Bank is expected to offer 140 billion euros on Wednesday, according to a Reuters poll, compared with 149.5 billion euros maturing this week, leaving excess liquidity around the same levels.
Benchmark three-month euro-Libor rates nudged up to 1.16750 percent on Tuesday, continuing their rising trend, as the ECB is increasingly expected to raise its key interest rate by 25 basis points next week. Eonia fixed at 0.622 percent on Monday. Barclays Capital rate strategist Giuseppe Maraffino expects it to decline towards 0.50 percent by next week and 0.40 percent by the end of the reserve period.
In normal liquidity conditions, Eonia trades just above the refi rate which is currently at 1 percent, but Reuters calculations show there is an excess of around 20 billion euros in the system. That is still much lower than almost 40 billion euros a month ago and over 100 billion euros at the end of last year. The reduction in excess liquidity has cooled banks' enthusiasm for parking funds at the ECB, which attracted only the 76.5 billion euros needed to offset its purchases of government bonds at weekly tender on Tuesday to take seven-day deposits from banks.
The ECB allotted 100 billion euros to banks in a seven-day operation at a fixed rate on Tuesday, just over 10 billion euros more than expiries, and above market expectations. The cost of the three-month longer-term refinancing operation (LTRO) on Wednesday will be indexed to moves in the ECB's key refi rate, which many expect to be hiked at least by 25 basis points over that period. But demand for Wednesday's LTRO should be high, as it will allow banks to roll loans at least until September through July's full allotment three-month ECB tender, which may be the last one at which banks could secure unlimited cash.