ECB rate hike signals push up Euribor rates

FRANKFURT: Key euro-priced bank-to-bank lending rates rose on Wednesday, a day after the European Central Bank signalled it would not back down from its plans to hike euro zone interest rates next month.

Interbank rates had slipped on Monday as higher market liquidity levels and concerns about the Greek debt crisis had seen some investors flirt with the possibility that the ECB may hold off from raising rates.

ECB President Jean-Claude Trichet quashed this idea on Tuesday, however, reiterating that the bank was in a mode of "strong vigilance", a phrase it uses to signal a hike at the next monthly meeting.

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 1.537 percent from 1.531 percent.

Six-month rates rose to 1.777 percent from 1.770 percent and 12-month rates rose to 2.150 percent from 2.143 percent.

Shorter-term one-week Euribor rates remained at 1.207 percent. EONIA overnight interest rates fixed at 0.839 percent, versus 0.846 percent on Monday.

The rises in the headline rates also came amid the prospect of lower market liquidity.

Excess liquidity currently stands at 64 billion euros according to Reuters calculations, but banks took 141 billion euros in the ECB's weekly handout of funding on Tuesday compared to 187 billion a week ago.

On Wednesday they also took 132 billion euros in 3-month ECB funding, little different from the 129 billion euros they borrowed back in March and which now has to be paid back.

Economists expect the ECB to follow up next month's rate hike with at least one more increase later in the year.

The central bank continues to offer limit-free funding to banks, a promise it extended this month until mid-October. .

While it is back to its pre-crisis range of funding operations, the euro zone debt troubles are preventing it from further normalisation.

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 at the height of the turmoil.

Euribor rates are fixed daily by the Banking Federation of the European Union (FBE) shortly after 0900 GMT.

Copyright Reuters, 2011