Key euro-priced interbank lending rates struck an 18-month high on Wednesday on reduced demand from banks for short-term European Central Bank liquidity and on rising expectations for an earlier-than-forecast interest rate hike. But a higher-than-expected take-up in the central bank's long-term operation on Wednesday alleviated fears of turmoil in the money market.
The ECB kept interest rates on hold at a record low 1 percent earlier this month, but said the eurozone faces short-term price pressures - taken by some in financial markets as a sign it could raise rates earlier than previously thought. ECB Governing Council member Patrick Honohan told Reuters on Tuesday that financial market moves to bring forward eurozone rate hike expectations were not surprising.
The euro hit a two-month high of $1.3723 versus the dollar on Wednesday on perceptions that interest rates will rise sooner in the euro zone than in the US and market interest rates faced upward pressure after demand in the ECB's 7-day liquidity operation missed expectations on Tuesday. Excess liquidity in the eurozone financial markets has dropped this year to about 16 billion euros from more than 100 billion at the beginning of the year.
However, banks' appetite for long-term ECB funds grew on Wednesday, with them taking more than 71 billion euros in the 91-day tender, replacing expiring 42.5 billion and well above earlier expectations of 53 billion, which should ease pressure on market rates in the next few days.
EONIA overnight rates rose to 1.035 percent on Tuesday, topping 1 percent for the first time in 19 months. The three-month Euribor rate - traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending - rose to 1.051 percent from 1.031 percent, the highest since July 2009, and rates in other maturities also shot up. Three-month loans are once again the longest maturity on offer and banks have now paid back all the six-month and 12-month loans the ECB injected at the height of the crisis.
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