The interbank cost of borrowing euros held broadly steady on Monday as banks held onto extra funds before the repayment later this week of 225 billion euros in loans to the European Central Bank. Key euro interbank could increase moderately in coming weeks on a reduction in excess liquidity as banks are expected to roll over less than 225 billion euros of the 1-year, 6-month and 3-month loans maturing on Thursday into shorter-dated loans.
A high rollover rate - above 60 percent of the maturing funds according to some strategists - would also signal increasing reliance on ECB funds by weaker banks in the euro zone's fringe states such as Ireland and Portugal, which have seen risk premia rise on concern about their fiscal health.
Banks are expected to roll over 200 billion euros of the 225 billion maturing loans into three-month funds being offered by the ECB on Wednesday, the median of a Reuters poll of 19 money market traders showed. That could squeeze excess liquidity by 25 billion euros to about 75 billion euros. London offered rates for three-month euros fixed at 0.82375 percent, unchanged from Friday while commercial banks's cash deposits at the ECB's overnight vaults rose to 84 billion euros from 74 billion.
Excess liquidity dropped to around 100 billion euros after the expiry at the end of June of 442 billion euros in 1-year funds, triggering a rise in euro interbank rates. The excess liquidity and the ECB's pledge to maintain short-term liquidity operations were, however, enough to keep key interbank rates from rising to the ECB's key refi rate of 1 percent, with the overnight EONIA rate rising by 10 basis points from the end of June to around 0.44 bps currently.