Money markets re-focussed on the chances of a Bank of England interest rate hike this year after it raised its medium-term inflation forecast on Wednesday. Downbeat news on first quarter growth in recent weeks had caused markets to push back their expectations for the BoE's first rate rise since 2007 into next year, in marked contrast to forecasts of a May rate rise that were widespread just a few weeks ago.
Sterling overnight interest rate swap rates showed markets almost fully pricing a rate hike in November, and fully by December, although many economists expect an earlier move. The so called Euro/UK 2/10 year swap box - which measures the relative steepness of the eurozone and UK rate curves narrowed to 94 basis points. The box had touched its widest since the introduction of the euro at around 97 bps earlier this week, according to Reuters data, reflecting the divergent monetary policy of the BoE and European Central Bank which has already raised rates from a record low.
With the ECB's new maintenance period beginning, traders said overnight cash was changing hands for around 0.95 percent, meaning the Eonia overnight rate would likely fix a little over 1 percent. Benchmark euro Libor rates edged lower to 1.37688 percent, while equivalent sterling rates were modestly higher at 0.82250 percent. The euro Libor/OIS spread widened 6 basis points to 23 basis points but traders said this was a function of overnight indexed swap rates falling on Tuesday after banks took more ECB liquidity than expected.
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