Euro interbank rates rose on Thursday but were well within recent ranges ahead of January's ECB news conference, with markets expecting current arrangements to support the banking sector to be left unchanged. As expected, the European Central Bank kept rates on hold at 1 percent. ECB President Jean-Claude Trichet will speak at the bank's regular news conference at 1330 GMT.
Benchmark three-month Libor rates edged up to 0.93188 percent, and Euribor rose for the first time in more than a month, although this was seen as a cyclical adjustment with banks scaling back cash built up to cover the year-end. The central bank is not expected to announce any change to its current offer of unlimited three-month banking sector loans until March. with the eurozone's financially weaker sovereigns set to remain under pressure throughout the first quarter.
Despite Portugal clearing its first supply hurdle of the year on Wednesday, structural weakness in its banking sector was highlighted by an increased dependence on ECB funding in December. Bank of Portugal data showed borrowing from the ECB jumped 8 percent to 40.9 billion euros. Persistent demand for ECB funds means a large surplus of liquidity is keeping overnight interbank rates low, with Eonia fixing at 37.6 bps and set to decline further as the end of the current reserve maintenance period approaches.
A better gauge of how much liquidity banks will demand in 2011 will come in the next ECB reserve maintenance period - the timeframe over which banks are required to deposit a set level of funds with the ECB - which begins on January 19. Current implied Eonia rates for June's ECB meeting were 0.829 percent according to ICAP data.