Key Euribor rates remain under downward pressure

FRANKFURT: Key euro-priced bank-to-bank lending rates remained flat or fell on Wednesday under the weight of excess liquidity and as markets focused on whether the simmering euro zone debt crisis will corset ECB rate hike plans.

Having effectively closed the door to a June rate hike last week, the ECB is expected to raise them in July to 1.5 percent, although the recent intensification of the region's debt crisis has seen some investors push back expectations further.

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 remained at 1.420 percent having fallen for the first time in two months over the past few days.

Six-month rates continued their recent fall, dropping to 1.699 percent from 1.701 percent, longer-term 12-month rates fell to 2.136 percent, while shorter term one-week rates fell further under the ECB's 1.25 percent official rate, to 1.177 percent from 1.196 percent.

As is normal when a new ECB reserves maintenance period kicks in, EONIA overnight interest rates fixed higher on Tuesday at 1.051 percent from 0.927 percent.

While expectations that the ECB may not be able to hike rates aggressively over the next year as economists may have been expecting is playing a role in current money market fluctuations, the recent rise in excess liquidity is applying greater downward pressure.

Excess euro money market liquidity currently stood at just over 63 billion according to Reuters calculations at the end of the last reserves period, the highest since early February.

It is unlikely to change much over the next week. Banks took 125 billion euros in the ECB's weekly refinancing operation on Tuesday and almost 81 billion in one-month funding, roughly in line with trader expectations and expiring amounts.

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.

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 backing 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.