Interbank eurozone lending rates rose on Friday after the European Central Bank said last week's move by banks to slash their use of ECB loans showed money markets were beginning to function more normally. The ECB on Thursday left interest rates at 1.0 percent as expected - indeed Commerzbank said market pricing shows a hike is not expected until the third quarter of 2012 - but policymakers also gave no sign of backing away from their plan to scale back crisis lending.
Eurozone banks reduced their ECB funding by 79 billion euros last week as longer-term financing operations matured, pushing up short-dated money market rates, though some of the rise was given back this week. The overnight Eonia rate has eased back to 0.40 percent from around 0.88 last week as banks' liquidity needs fell at the end of the reserve maintenance period. But it is expected to rise again next week when the central bank's new maintenance period begins, unless banks considerably increase their uptake of one-week funds.
One week rates rose more than 15 bps in the last couple of days in anticipation of a surge in Eonia. Banks could also build excess reserves by not participating in the ECB's weekly drain of funds to offset its purchases of government bonds, though this is seen as less likely than increasing take-up of funds at the weekly tender. Three-month euro Libor rates rose half a basis point to 0.90813 percent, with equivalent dollar rates steady at 0.28906 percent. Earlier, the three-month Euribor rate hit a 14-month high of 0.972 percent.