The rate at which banks borrow euros overnight may settle at its highest since March 2009 on Thursday as banks rush to meet their reserve needs with the ECB before Easter, but it should fall after next week's cash tenders. Traders said banks were paying 1.5-1.6 percent to borrow overnight, compared with Wednesday's settlement at 1.215 percent and - for the first time since early February - above European Central Bank's refi rate, now at 1.25 percent.
The Eonia rate has risen from about 0.8 percent at the start of the new reserve period last week, a typical pattern as banks tend to try to meet their requirements in the early part of the period, this one being shortened by a series of public holidays. "We have a very limited excess liquidity in the system and banks are frontloading their reserves. The very long weekend triggered such a rise in short-term rates," said Patrick Jacq, rate strategist at BNP Paribas. Excess liquidity in the money market is currently around 20 billion euros, according to Reuters calculations, sharply down from levels around 100 billion euros late last year. It is expected to rise by 10-15 billion euros after the tenders.
Euribor futures rose by up to 5 basis points across the 2011-2012 strip, pushing their implied rates slightly lower. Renewed tensions in the eurozone's lower-rated states due to talk of Greek debt restructuring may have caused the blip, but analysts expect the move to reverse soon. London interbank offered rates for three-month euros rose further to 1.31750 percent from 1.30313 percent on Wednesday. Markets are almost fully pricing in three more rate hikes by the end of the year.
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