Key Euribor rates rise to two-year highs

Key euro-priced bank-to-bank lending rates ticked up to two-year highs on Friday as markets sought to discern whether strong euro zone growth and faster inflation will prompt the ECB into further rate hikes this year. Germany, Europe's largest economy, grew by a startling 1.5 percent in the first three months of the year, data showed last week, with France also growing by a robust 1.0 percent.
With euro zone inflation also now at 2.8 percent, the highest since the financial crisis sent the global economy into a tailspin in late 2008, the ECB is expected to hike interest rates to 1.5 percent in July. The belief is driving bank-to-bank lending rate higher.
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 - rose to 1.435 percent on Friday from 1.434 percent. Six-month rates edged up to 1.720 percent from 1.717 percent and longer-term 12-month rates increased to 2.159 percent from 2.157 percent, while shorter-term one-week rates remained at 1.189 percent.
EONIA overnight interest rates fixed on Thursday at 1.161 percent, up from 1.152 percent the previous day. Excess liquidity currently stands at just under 28 billion euros according to Reuters calculations, having hit 60 billion at the end of the last reserves period, the highest since early February.
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. With the euro zone debt crisis refusing to abate and money market dysfunctionality equally stubborn, some experts argue the ECB will have to prolong its support again. It is already back to its pre-crisis range of funding operations. Three-month loans are 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.