Euro interbank rates pressed higher on Friday despite some relief in the cost of overnight borrowing, with analysts predicting the recent upward trend would continue into next week's European Central Bank meeting. The rate at which banks believed they could obtain three-month funds from the market rose across contributors to the UK-based Libor and larger European Euribor fixings panels.
This came despite a fall in overnight rates - unwinding some of the recent spike upwards - caused by a modest improvement in liquidity conditions after an increase in banks' borrowing from the ECB. Benchmark three-month euro Libor rose for the 12th straight session to 1.005 percent - the highest since early July 2009. Equivalent Euribor rates rose to 1.063 percent. Analysts said this upward trend was led by increasing expectations of ECB rate hikes, and was unlikely to let up ahead of next week's rate-setting meeting.
Traded Euribor futures contracts were barely changed on the day, having fallen sharply since the last ECB meeting when ECB President Jean-Claude Trichet issued a surprisingly hawkish inflation warning.
The December 2011 Euribor contract was last at 98.13, implying an expected Euribor rate of 1.87 percent. This compares to a rate of 1.325 percent implied by the same contract at the beginning of January. Overnight deposits at the central bank, which earn interest at a rate of 0.25 percent, rose to 26 billion euros, showing that despite an improvement in liquidity conditions there was still little appetite to lend to other banks.
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