Euro interbank lending rates hit their highest in almost two years on Monday, with news that the European Central Bank was preparing a new lending facility reinforcing bets it will raise interest rates next month.
A euro zone central bank source told Reuters on Saturday that the ECB was putting the finishing touches to a new scheme to ensure troubled banks have access to medium-term liquidity, in a move that was seen as a step towards monetary policy normalisation.
Although seen as an attempt at solving the problem of banks addicted to ECB's liquidity operations, markets see the news as "liquidity neutral" for now but are awaiting details about how different the new facility would be compared to the current Emergency Liquidity Assistance programme.
Benchmark three-month euro-Libor rates fixed at 1.16 percent, their highest since June 2009, while expected overnight index swap rates for April were 25 basis points higher than levels just before the last ECB meeting. Expectations the ECB will raise interest rates by 25 bps next month, which briefly faded on uncertainty over the global economic impact of Japan's nuclear crisis, rebounded last week after ECB President Jean-Claude Trichet signalled the bank's stance had not changed.
Euribor futures were 1-5 ticks lower across the 2011-2012 strip. Portuguese banks have recently gained full access to central counterparty clearing services, providing relief for credit institutions that have been shut out of interbank markets during the sovereign debt crisis.
A raft of ratings downgrades since the Portuguese government collapsed last week, including Standard & Poor's cutting the credit ratings of five Portuguese banks on Monday, have added pressure on the country's banking system. Central counterparty clearing services allow banks to remain anonymous when trading repo, with the clearing house assuming the clearing members' counterparty risk.
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