Lower money market liquidity pushes up Euribor rates

Key euro-priced bank-to-bank lending rates rose on Friday, pushed up by tight money market liquidity, receding Greek debt restructuring fears and the prospect of further European Central Bank rate hikes. The three-month Euribor rate - traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending - hit a new two year high, inching up to 1.436 percent from 1.435 percent.
Six-month rates rose to 1.716 percent from 1.714 percent, while 12-month rates rose to 2.139 percent from 2.137 percent. EONIA overnight interest rates fixed at 0.876 percent on Thursday from 0.849 percent the previous day. Shorter-term one-week Euribor rates bucked the trend, dropping to 1.017 percent from 1.026 on Thursday, a level well below the official ECB interest rate of 1.25 percent.
Excess liquidity currently stands at just under 6 billion euros according to Reuters calculations having hit 60 billion at the end of the last reserves period, the highest since early February. Besides ECB policy rates, market attention is intensifying on what the central bank will do with its unlimited liquidity policy in the coming months, a decision originally expected for next week.
In March it left all its operations at full allotment until mid-July, putting its exit strategy on hold for the second quarter running. With the euro zone debt crisis refusing to abate and money market dysfunction equally stubborn, some experts argue the ECB will have to prolong its support again.
ECB policymaker Lorenzo Bini Smaghi said in an interview on Monday that the bank may not be ready to make a decision in June. The ECB is already back to its pre-crisis range of funding operations. Three-month loans are again the longest maturity on offer and banks have now paid back all the six-month and 12-month loans the ECB injected during the turmoil. Banks trimmed their intake of ECB funding this week, taking 110.7 billion euros in 7-day funding compared with 116 billion last week.