Concerns over an impasse on the Greek crisis have prompted investors to pare back expectations in money markets for monetary tightening, but worries over inflation mean they will continue to price in rate hikes. Euribor interest rate futures were broadly steady on Thursday dipping in and out of negative territory.
Investors were balancing the need for higher interest rates to fight off price pressures currently running above the bank's inflation target with risks that a Greek default - if it happens - could have a knock-on effect on other eurozone states and dry up the regional banking system.
"There were a number of factors that were driving the Euribors higher over the last couple of days, notably the crisis in Europe," Peter Schaffrik, head of European rate strategy at RBC Capital Markets said. "But for me the ECB is not going to react to what is happening at the moment. I think they will still hike rates. Because in their mind nothing has changed on the growth and inflation front."
Upside risks to medium-term inflation outlook have emerged as the economic recovery takes hold, European Central Bank President Jean-Claude Trichet said earlier, adding the ECB was "carefully monitoring" to avoid a feed-through from commodity prices into longer-term inflation expectations. Eurozone inflation was currently running at 2.8 percent in April, above the ECB's target of maintaining it at or slightly below 2 percent.
Benchmark bank-to-bank lending rates pulled further back from two-year highs as excess liquidity at just over 19 billion euros was still considered comfortable albeit far lower than the 60 billion euros at the end of the last ECB reserve period which ended May 10.
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