Euro interbank lending rates rose on Monday with a larger-than-expected jump in eurozone inflation adding to speculation that the European Central Bank may raise interest rates in coming months. Money market rates have been marching higher over the last two weeks on firming expectations of ECB rate rises after bank President Jean-Claude Trichet talked tough on rising price pressures at the bank's January meeting.
A first rise in the ECB's 1 percent refinancing rate is now priced in by September with a further rise before year-end, according to BNP Paribas. A gauge of long-term eurozone inflation expectations rose to within a whisker of its highest level in more than two years.
The French 10-year breakeven rate (BE), the yield spread between inflation protected French government bonds and equivalent nominal bonds rose to 2.19 percent, its highest level since September 2008. But the ECB's preferred measure of inflation expectations, the 5-year, 5-year forward breakeven rate, at 2.43 percent was only at its highest since mid-2010.
Benchmark three-month euro Libor rates were fixed almost 2 basis points higher at 1.02375 percent, their highest since July 2009. Equivalent overnight rates jumped 27 basis points to 1.23 percent, with month-end lending restrictions exacerbated by the lack of excess liquidity in the banking system.
The overnight Eonia rate had eased at Friday's fixing helped by an increase in banks' take-up of three-month ECB funds last week and is seen falling further into the end of the central bank's reserve maintenance period over the next week.
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