Short-term sterling-priced interest rates rose on Wednesday as the market bet the Bank of England could raise rates sooner than thought after surprisingly strong UK construction data. Firming expectations that the European Central Bank will raise rates during the summer also kept benchmark euro-priced interbank rates at 19-month peaks although they rose more slowly than in recent days after banks stocked up on ECB weekly funds on Tuesday.
Short sterling rate futures were down as much as 10 ticks on the 2011/2012 strip and the two-year gilt yield hit a 19-month high on bets that a strong reading on services PMI would encourage the BoE to raise rates earlier than expected. London offered rates for three month sterling extended their march higher to fix at 0.78813 percent, up from 0.78188 percent the previous day.
"It's going to be difficult to turn the bearish tide (of) higher yields and higher money market rates until we get clarification from the Bank of England and the inflation report that they are not ready to raise rates while there's too much uncertainty," said Lloyds TSB markets economist Kenneth Broux.
Implied interest rate futures based on overnight index swaps were pricing in a near 80 percent chance of a 25 basis point rate rise in May, up from around 40 percent late last week after a shock contraction in UK fourth quarter gross domestic product. But not many market observers expect the BoE to raise rates any time soon, including Lloyds' Broux. In euro money markets, three-month Euribor rates - the main gauge of unsecured interbank euro lending, and a mix of interest rate expectations and banks' appetite for lending - rose to 1.083 percent from 1.082 percent, the highest since early July 2009. Other longer-term rates also rose. Six-month rates increased to 1.333 percent from 1.331 percent and 12-month rates to 1.666 percent from 1.660 percent, both also their highest in more than 1-1/2 years.
The shorter-term one-week rates bucked the trend and fell to 0.885 percent from 0.951 percent. Demand for ECB weekly cash rose on Tuesday to its highest level this year, putting downward pressure on one-week rates. Overnight rates rose to 1.318 percent on Tuesday, the highest since June 2009. They topped 1 percent for the first time in 19 months last week.