Eonia seen slipping on higher cash excess

The eurozone's key overnight lending rate is set to fall in coming days after banks increased demand for European Central Bank funds on Tuesday, lifting the cash surplus in the financial system. Overnight Eonia fixed at its highest in three years at 1.43 percent on Thursday as banks scrambled to meet their reserve needs with the ECB before the Easter break and as excess liquidity in the euro system dwindled to nine billion euros from around 20 billion, according to Reuters calculations.
But with banks having bid for 118 billion euros at the ECB's weekly tender compared with 97 billion euros last week, boosting excess liquidity by around 20 billion euros, the upward trend in Eonia was expected to start reversing on Tuesday. The ECB's tender of three-month funds could further boost excess liquidity if market participants remained concerned about the continued pressure on EONIA fixings for the rest of the reserve maintenance period ending May 10, some analysts said.
The central bank is expected to allot 75 billion euros at the long-term refinancing operation, according to a Reuters poll of money market traders. Tuesday's increased bank take-up of seven-day funds and a stable reserve requirement balance was likely to keep the liquidity surplus at a more comfortable 30 billion euros - excluding Wednesday's three-month refinancing operation - in the coming week, some analysts said.
Besides dwindling liquidity, short-term money market rates have climbed to their highest levels in two years and are set to climb higher as traders bet the ECB will raise official borrowing costs again in July after a rate hike earlier this month ended almost two years of record-low interest rates. London interbank offered rates fixed up at 1.32125 percent versus 1.31750 percent on Thursday while the equivalent Euribor rate fixed at rose to 1.361 percent, the highest since late April 2009, from 1.356 percent the previous day.