Key Euribor rates pick up again as growth surprises

Key euro-priced bank-to-bank lending rates crept higher on Friday as markets focused on whether stronger-than-expected economic growth in the euro zone will prompt the ECB to proceed with further rate hike plans. Germany, Europe's largest economy, grew by a startling 1.5 percent in the first three months of the year, data showed on Friday, with France only paling a little in comparison, growing by 1.0 percent.
Having effectively closed the door to a June rate hike last week, the ECB is expected to raise them in July to 1.5 percent, although the recent intensification of the region's debt crisis has seen some investors push back expectations further. The three-month Euribor rate - traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending - increased to 1.425 percent from 1.420 percent, having fallen for the first time in two months over the past few days. Six-month rates edged higher to 1.703 percent from 1.699 percent, longer-term 12-month rates increased to 2.141 from 2.136 percent.
Shorter term one-week rates fell further, however, under the ECB's 1.25 percent official rate, to 1.174 percent from 1.177 percent amid excess liquidity. As is normal when a new ECB reserves maintenance period kicks in, EONIA overnight interest rates fixed higher on Thursday at 1.061 percent from 1.051 percent.
While expectations that the ECB may not be able to hike rates aggressively over the next year as economists may have been expecting is playing a role in current money market fluctuations, the recent rise in excess liquidity is applying greater downward pressure.
Excess euro money market liquidity currently stood at just over 63 billion according to Reuters calculations at the end of the last reserves period, the highest since early February. It is unlikely to change much over the next week. Banks took 125 billion euros in the ECB's weekly refinancing operation on Tuesday and almost 81 billion in one-month funding, roughly in line with trader expectations and expiring amounts.
Besides ECB policy rates, market attention is intensifying on what the central bank will do with its unlimited liquidity policy in the coming months, a decision it is expected to make in June. In March it left all its operations at full allotment until mid July, putting its exit strategy on hold for the second quarter running.