Key euro zone interbank rates rose further on Tuesday on expectations of at least two more interest rate hikes by the year-end although a worsening of the region's debt crisis could force a scale back of those bets. Money markets were unfazed for now by speculation overborrowed Greece will restructure its debt soon but market participants say an escalation of uncertainty about who was holding the debt could lead to interbank liquidity drying up.
Tough talk from European Central Bank officials kept the market focus on tightening monetary policy, with Executive Board member Juergen Stark saying interest rates were still "very accommodative" and the ECB has reached the limits of support for troubled banks.
"For the moment the market has not removed its bias for further rate hikes because the ECB did not signal they had changed their minds," said Patrick Jacq, a strategist at BNP Paribas. The market is pricing in the next eurozone rate hike by July at the latest, and at least one more by the end of the year.
September to December Euribor futures fell by up to 5 basis points while across the 2012 strip, they were down as much as 7.5 basis points, pushing their implied rates up. London interbank offered rates for three-month euros rose further to 1.29125 percent from 1.28688 percent on Monday.
Equivalent Euribor rates - traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending - rose to 1.343 percent, the highest since May 2009 and up from 1.338 percent the previous day.
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