Key euro-priced bank-to-bank lending rates hit new two-year highs on Friday, after the European Central Bank signalled that it will raise rates next month. The ECB policymakers kept rates on hold at 1.25 percent on Thursday, and decided it would continue to provide banks with unlimited liquidity to support the recovery.
ECB President Jean-Claude Trichet said the bank would exercise "strong vigilance" on inflationary pressures, deploying a phrase that has consistently been used in the past to signal a hike was a month away. 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, rising to 1.469 percent from 1.464 percent.
Shorter-term one-week Euribor rates also rose to 1.248 percent from 1.213 percent. Longer-term rates, however, fell. Six-month rates edged down to 1.739 percent from 1.741 percent and 12-month rates ticked down to 2.145 percent from 2.157 percent.
EONIA overnight interest rates fixed at 1.296 percent on Thursday from 1.065 percent the previous day. In addition to interest rate expectations, lower levels of liquidity have contributed to higher market interest rates. Liquidity levels are not in excess of the amount the ECB expects the market needs for the first time since June 2009, according to Reuters calculations.
With the euro zone debt crisis refusing to abate and money market problems equally stubborn, some experts argued the ECB will have to prolong its support again. Banks trimmed their intake of ECB funding last week, taking 102.4 billion euros in seven-day funding compared with 110.8 billion euros last week.
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