Overnight euro borrowing costs rose on Wednesday, the first day of the European Central Bank's new reserve maintenance period, after it raised interest rates last week. Traders said overnight cash was being lent at around 1.10 percent and the Eonia overnight rate would probably fix around 1.15 percent later in the day. That compares with 0.84 percent at the beginning of March's maintenance period during which the average rate was 0.67 percent, according to Reuters calculations.
A 1.15 percent Eonia fix is slightly higher relative to the ECB's refinancing rate, which has been raised to 1.25 percent from 1.0 percent, with the rise due to there being less excess liquidity in the banking system. "We've seen a steady decline in take-up at (ECB weekly financing operations) as banks self-impose withdrawal measures," ICAP broker Kevin Pearce said.
While rising interest rates are the main determinant further along the eurozone curve, overnight rates remain largely driven by banks' dependence on ECB liquidity support. Banks raised their borrowing from the ECB by around 11 billion euros at its regular offering of one-month and one-week loans on Tuesday.
Excess liquidity has dropped to below 30 billion euros in recent weeks compared with more than 300 billion in mid-2010. The ECB has pledged to keep offering banks unlimited funding with maturities up to three months until July, putting its exit strategy from stimulus measures on hold for the second quarter running. Benchmark three-month euro Libor rates were a basis point higher at 0.81938 percent, while overnight rates were 26.6 bps higher at 1.09063 percent.
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