Key euro-priced bank-to-bank lending rates on Friday posted the strongest one-day rise since October, as unease about Spain's banking sector filtered through markets still digesting last week's inflation warning from the ECB. The European Central Bank kept interest rates on hold at a record low of 1 percent last week, but said the euro zone faces short-term price pressures - taken by some in financial markets as a sign it could raise rates earlier than previously thought.
Analysts said the recent rise in short-term market rates was due to ECB President Jean-Claude Trichet's hawkish tone on inflation last week, though upward pressure was expected to ease soon. "We don't see scope for a big rise in Euribor rates, given that the most probable driver is monetary policy," Unicredit analyst Elia Lattuga said.
Unicredit expects the first ECB rate hike to come late this year, and Lattuga said the three-month Euribor rate should remain relatively close to 1.0 percent in the near future. The three-month rate - traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending - rose to 1.025 percent from 1.016 percent for its strongest one-day rise since October 21.
Other closely watched rates also rose. Six-month rates increased to 1.270 percent from 1.260 percent, 12-month rates hit a 1-1/2 year high of 1.578 percent, while one-week rates ticked up to 0.746 percent from 0.710 percent. Tight liquidity conditions at the start of the current reserve maintenance period - the timeframe over which banks are required to deposit a set level of funds with the ECB - meant that overnight rates held at elevated levels - Eonia rates rose to 0.713 percent on Thursday.
The three-month Euribor rate broke above the European Central Bank's 1.0 percent benchmark rate for the first time in well over a year in October in what was expected to be a milestone in money markets' return to normality. Rates began falling again in December, however, as the euro zone debt crisis intensified and forced the ECB to extend its limit-free lending support.