Key Euribor rates hit 2-year high

FRANKFURT: Key euro-priced bank-to-bank lending rates hit their highest in two years on Monday as last week's fresh jump in euro zone inflation supported expectations the ECB will raise interest rates again in the coming months.

Euro zone inflation hit 2.8 percent in April, its fastest annual rate in more than 2-1/2 years and well above the ECB's targeted level of just under 2 percent.

The central bank raised euro zone rates by a quarter of a percentage point to 1.25 percent last month, ending almost two years of record-low interest rates and kicking off what economists expect to be a run of increases.

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 1.395 percent on Monday, the highest since April 2009 and up from 1.385 percent on Friday.

Six-month rates rose to 1.682 percent from 1.675 percent, shorter-term one-week rates increased to 1.231 percent from 1.226 percent while longer-term 12-month rates rose to 2.139 from 2.132 percent.

EONIA overnight interest rates fixed at 1.420 percent on Friday up from 1.282 percent.

Excess liquidity currently stands at just under 7 billion according to Reuters calculations.

Two-thirds of the 62 economists polled by Reuters after last month's ECB rate hike expect another increase by July at the latest.

Besides ECB policy rates, attention is focused on what the central bank will do with its unlimited liquidity policy in the coming months.

In March it left all its operations at full allotment until July, putting its exit strategy on hold for the second quarter running. But recent comments from Ewald Nowotny and Axel Weber have increased expectations that the bank will soon restart the phasing out process.

It is already back to its pre-crisis range of funding operations. Three-month loans are again the longest maturity on offer and banks have now paid back all the six-month and 12-month loans the ECB injected during the turmoil.