Euro interbank lending rates hit fresh 21-month highs on Friday, boosted by a firm belief the European Central Bank will raise interest rates next week, but expectations of further hikes by year-end may be overdone. The Eonia overnight rate spiked to 0.9 percent on Thursday as banks took overnight funds to see them across the end of the first quarter, with traders saying it should fall back below 0.6 percent at Friday's fixing.
The overnight rate is seen at 1.27 percent by July's ECB meeting and 1.76 percent by the December meeting. Benchmark three-month euro Libor rates nudged up to 1.19 percent, with equivalent Euribor rates up a basis point at 1.249 percent. Three-month dollar Libor rates were modestly lower at 0.30100 percent.
Recent ECB policymaker comments have cemented expectations the bank will raise rates, which have been frozen at a record low 1 percent since May 2009, in April. Those expectations were reinforced by data on Thursday showing euro zone inflation unexpectedly rose in March. Markets are now fully pricing in three interest rate rises by the end of the year - taking the main refinancing rate to 1.75 percent. But analysts said that could be too much given the ongoing problems with the euro zone's most indebted countries, rising oil prices and the prospect of rate hikes squeezing growth. "The ECB need not move forward aggressively ... there is probably a little too much focus on the near term, which is taking away from the uncertainty that still surrounds the medium-term euro zone growth outlook," said Lena Komileva, global head of G10 strategy at Brown Brothers Harriman.
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