Euro interbank lending rates rose on Monday as ECB officials indicated an April interest rate hike was still very much on the cards, and analysts said there was still room to price in further tightening this year. European Central Bank President Jean-Claude Trichet said on Friday the bank had no new message on monetary policy following the disasters in Japan and reiterated the statement on Monday, bolstering expectations the bank will hike euro zone interest rates next month.
Markets are now fully pricing in an April rate rise - the overnight indexed swap rate implied for next month's ECB meeting was at 98 basis points, more than 25 bps over the two-week Eonia rate, which stood at 0.715 percent and which serves as a proxy for ECB base rates.
ECB Governing Council member Yves Mersch also reiterated the point, saying on Monday the central bank had indicated a stance of "very high vigilence" and that inflationary risks were clearly on the upside. That pushed money market rates up a couple of basis points across the curve from the three-month maturity. Markets still only fully price in two rate hikes this year, compared with three before the Japan earthquake and an escalation in tensions in the Middle East.
"There's still a suggestion in the market that they might hike a couple of times and then stop and that uncertainty will continue to be priced for now, especially with the Japanese situation as such an uncertainty for the second quarter," said Societe General economist James Nixon. OIS rates at December's ECB meeting are at 1.65 percent but analysts said more could be priced in.
Traders said flows were light ahead of the end of the quarter and financial year-end when banks typically hoard cash to "window dress" their balance sheets. "There are only a few offers in the weeks and the approaching financial year-end means there are even less over the quarter turn," said ICAP broker Kevin Pearce. Benchmark three-month euro Libor rates were half a basis point higher at 1.12688 percent, with equivalent dollar rates unchanged at 0.30900 percent.
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