Benchmark euro-priced interbank rates extended their rise on Monday as the market reassessed how soon the European Central Bank was likely to start hiking interest rates in light of hawkish comments on eurozone inflation. ECB President Jean-Claude Trichet warned last week that the eurozone faced short-term price pressures, pointedly reminding markets that the central bank did not hesitate to hike rates in June 2008 at the height of the financial crisis.
Shorter-dated German bond yields fell on Orphanides' remarks, giving back some of the advances to 12-month peaks above 1 percent made last Friday, but key euro-priced interbank rates were fixed higher for a third consecutive session. London interbank offered rates for three-month euros were set at 0.94000 percent from 0.93813 percent on Friday while the equivalent Euribor rate - fixed by a wider panel of European banks than Libor - was up at 1.009 percent versus 1.006.
The three-month Euribor rate broke above the ECB'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. The ECB has pledged to keep its unlimited funding provision in place in the first quarter, but a reduction in demand is seen leading to a rise in the Eonia overnight rate from Wednesday, the central bank's next maintenance period.
The overnight rate fixed at 0.36 percent on Friday and BNP Paribas' Jacq expects it to rise just above 0.70 percent going into the new reserve maintenance period before gradually declining below 0.40 percent, with excess liquidity seen close to banks' needs. The ECB is expected to allot 180 billion euros ($240 billion) at its weekly refinancing operation and 60 billion euros at the three-week maintenance period tender this week, a Reuters poll showed on Monday.
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