The benchmark cost of interbank euro lending rose on Friday as expectations the ECB would signal next week it is moving closer to tightening policy outweighed the effect of a short-term improvement in banking sector liquidity. The European Central Bank meets to discuss policy on March 3 and markets are expecting the bank to step up its language on measures to tackle inflation after a wave of hawkish comments from members of the bank this month.
Despite a rise in surplus banking sector liquidity, the three-month Libor rate rose for a fourth consecutive day to 1.04625 percent and the equivalent Euribor rate climbed to 1.092 percent. "This move is driven by rate hike expectations in the market and not so much by the liquidity situation," said Elwin de Groot, senior market economist at Rabobank.
Interest rate futures showed a 25 basis point rate hike in the euro zone was fully priced in by August 4, with a 73 percent chance of a hike coming as early as the ECB's July 7 meeting. Liquidity conditions in the banking sector, which add to upward pressure on overnight rates when worsening, showed a slight improvement against the previous day's level.
The recent exceptionally high usage of the ECB's emergency overnight borrowing facility fell by 12.7 billion euros after Ireland's High Court approved the sale of deposits from Anglo Irish Bank and Irish Nation-wide on Thursday. The Eonia overnight rate edged higher to 0.666 percent, but with banks well ahead of their reserve maintenance requirements, more cash was likely to be freed up in the coming week, also helping keep a lid on further rate rises.
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