A massive take-up by banks of European Central Bank funds on Tuesday is set to halt the rise in short-term money market rates in coming days but a sustained reversal in the uptrend is unlikely given rate hike expectations. Banks took up 213.7 billion euros in weekly funds at a flat rate of 1 percent, exceeding market expectations and the first time this year that they have asked for more than 200 billion euros at these ECB tenders.
Excess liquidity should climb to about 60 to 80 billion euros after the cash is handed out on Wednesday and push the liquidity-driven overnight EONIA rate down to just below the ECB's key refi rate of 1 percent in the near-term. The EONIA rate - a benchmark interest rate for unsecured euro-priced overnight interbank lending - topped the ECB's main interest rate of 1.0 percent for the first time in 19 months last week and rose further to 1.313 percent on Monday.
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. Implied interest rate futures suggest an almost 80 percent possibility the ECB will raise rates by 25 basis points in August from the current record low of 1.0 percent. Benchmark euro-priced interbank rates marched higher ahead of the meeting, with three-month euro Libor rates fixed at a fresh 18-month high of 1.02500 percent while equivalent Euribor was up at a 19-month peak of 1.082 percent.
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