Euribor rate mostly lower

Investors expect the European Central Bank to raise rates again this year but uncertainty over a solution to the Greek crisis prompted them to scale back the pace of an expected tightening, money markets showed on Tuesday. Euribor interest rate futures were mostly lower but the July 2011 contract firmed slightly to 98.445, showing investors were still broadly pricing in a rate hike in July.
The real doubt was on the timing of a potential rate rise beyond that month, analysts said. Investors last week scaled back the possibility of another rate increase after July as concerns over the Greek debt crisis mounted, but investors maintain that an economic recovery and above-target inflation still warrant an ECB move. "The evidence is still pointing towards an ongoing economic recovery and risks to inflation remaining to the upside, so from that perspective I would argue that there is still sufficient evidence that would support a rate hike in July," said Elwin de Groot, senior market economist at Rabobank.
Fuelling such uncertainty, eurozone inflation slowed by more than expected in May to 2.7 percent year-on-year, but this was due to lower oil prices and was seen as temporary. Inflation was still above a target of around just below 2.0 percent. Investors do not expect the ECB to raise borrowing costs at next week's policy meeting but will look to see if President Jean-Claude Trichet signals a rate hike by making reference to "strong vigilance" in regards to the inflation outlook.
Analysts said Eonia overnight rates should fall, with the cash surplus in the banking system expected to remain ample for the next two weeks despite a 5.3 billion euro decrease in the take-up of weekly ECB loans. Eonia fixed at 0.847 percent on Monday, down from 0.921 percent at the end of last week and well off the current maintenance period high of 1.16 percent.