Key euro-priced bank-to-bank lending rates fell for the first time since early March on Friday after the ECB signalled a June rate hike was unlikely and delivered a more moderate message on inflation.
The European Central Bank left euro zone interest rates at 1.25 percent as expected at its May policy meeting on Thursday, but a less aggressive tone on inflation from the bank's President, Jean-Claude Trichet, triggered a sharp 3 cent drop in the euro versus the dollar as investors pushed back rate hike expectations.
The softer tone brought an end to the two month upward march in interbank lending rates which has been driven by firming rate hike expectations and leaner money market liquidity. 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 - fell to 1.419 percent from 1.424 percent.
Six-month rates dropped to 1.703 percent from 1.713 percent while longer-term 12-month rates fell to 2.152 percent from 2.173 percent. One-week rates bucked the trend rising to 1.216 from 1.202. EONIA overnight interest rates fixed at its lowest in almost a month, however, dropping to 0.854 percent from 1.045.
The drops also come after banks pushed up market liquidity by scaling up their intake of ECB funding this week in reaction to the recent spell of leaner market liquidity. Excess euro money market liquidity currently stands at just under 60 billion according to Reuters calculations, the highest since early February. Besides ECB policy rates, market attention is intensifying on what the central bank will do with its unlimited liquidity policy in the coming months, a decision it is expected to make in June.
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