FRANKFURT: Key euro-priced bank-to-bank lending rates hit their highest levels in two years on Wednesday, buoyed by expectations the ECB could raise interest rates again as early as June.
The ECB raised euro zone rates by a quarter of a percentage point to 1.25 percent last month, ending almost two years of record-low interest rates and kicking off what economists expect to be a series of increases.
The bank holds its monthly policy meeting on Thursday. While July is the current consensus, some economists believe it may lay the ground for another hike as early as June following recent anti-inflation talk from ECB policymakers.
Euro zone Inflation hit 2.8 percent in April, its fastest annual rate in more than 2-1/2 years and well above the ECB's price stability target of just under 2 percent.
The combination of firming rate hike expectations and the recent spell of leaner excess money market liquidity has been driving the rise in interbank lending rates over the last month.
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 -- rose to 1.415 percent on Wednesday, the highest since April 2009 and up from 1.402 percent on Tuesday.
Six-month rates rose to 1.700 percent from 1.688 percent, longer-term 12-month rates rose to 2.157 from 2.143 percent.
Shorter-term rates bucked the trend, however. One-week rates fell to 1.200 percent from 1.241 percent while EONIA overnight interest rates fixed at 1.260 percent on Tuesday, down from 1.489 percent.
The drops came after banks reacted to a recent spell of leaner market liquidity by ramping up their intake of ECB funding to 127.5 billion euros from 117.8 billion a week ago. They receive the money on Wednesday.
Excess euro money market liquidity currently stands at just under 40 billion according to Reuters calculations. It has been sparser than usual in recent weeks, averaging 17 billion euros so far this ECB reserves period, down from 27 billion last month and 72 billion in the period that spanned the turn of the year.
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.
In March it left all its operations at full allotment until mid July, putting its exit strategy on hold for the second quarter running.
Recent comments from Ewald Nowotny and Axel Weber have suggested the bank could restart the phasing out process, but with the euro zone debt crisis refusing to abate and money market dysfunctionality equally stubborn, some experts argue the ECB will have to prolong its support again.
It is already back to its pre-crisis range of funding operations. Three-month loans are again the longest maturity on offer and banks have now paid back all the six-month and 12-month loans the ECB injected during the turmoil.
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