Euro interbank lending rates hit their highest in almost two years on Tuesday but some analysts questioned whether the market has gone too far in pricing in a series of rises in official lending rates. The shock sign from the European Central Bank last week that it could tighten policy as soon as next month has prodded investors to price in as many as three rises by the end of the year with the first expected in April.
Expected overnight indexed swap rates by the time of the bank's next policy meeting have risen 20 basis points since last week and benchmark three-month euro Libor rates fixed at 1.12938 percent, their highest since June 2009. The ECB's decision to keep its liquidity operations at full allotment for at least another three months - supporting banks in peripheral countries that are having trouble accessing funding - is keeping the Eonia overnight rate pinned below the bank's one percent refinancing rate.
Banks on Tuesday added almost 8 billion euros to their ECB borrowings at one-week and one-month operations but overall excess liquidity remains low compared with the last two years with around 35 billion euros worth going into the new maintenance period, analysts said. The average Eonia fixing for February's maintenance period will be around 0.65 percent, the bank said, compared with 0.82 percent in January, showing rates had come back down later in the maintenance period. The Bank of England holds its next policy meeting on Thursday and is expected to keep rates on hold for now. But some policymakers are growing increasingly nervous about the threat of inflation, and three of the nine-strong Monetary Policy Committee voted to raise interest rates in February.
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