Key euro-priced bank-to-bank lending rates rose to an 18-month high on Friday, as excess liquidity dwindled and markets brought forward rate hike expectations following aggressive inflation talk by ECB members. 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 - rose to 1.063 percent from 1.057 percent, the highest since July 2009.
Other longer-term bank-to-bank rates also rose on Friday. Six-month rates increased to 1.307 percent from 1.301 percent and 12-month rates to 1.625 percent from 1.615 percent, both also highest in 1-1/2 years. The shorter-term one-week rates bucked the trend and fell to 0.897 percent from 0.900 percent. Overnight rates fixed at 1.063 percent on Thursday, having topped 1 percent for the first time in 19 months earlier this week.
The ECB kept interest rates on hold at a record low of 1 percent earlier this month, but said the euro zone faces short-term price pressures - taken by some in financial markets as a sign it could raise rates earlier than previously thought.
The rise in interbank rates has also been led by banks who have also showed less appetite for European Central Bank liquidity since the start of the year, with excess liquidity now at the lowest level in 1-1/2 years. Governing Council member Patrick Honohan told Reuters on Tuesday the financial market moves to bring forward euro zone rate hike expectations were not surprising.
Two other ECB policymakers warned of a rising tide of imported inflation on Thursday, pushing up the euro and Bund yields on the view that the ECB could start taking corrective action. The three-month Euribor rate broke above the ECB's 1.0 percent benchmark rate for the first time in well over a year in October in what was expected to be a milestone in money markets' return to normality.
The intensification of the debt crisis in November saw a temporary reversal, however, with banks sucking up extra ECB funding and pushing excess liquidity back up over 100 billion euros. There has been a rapid improvement in recent weeks though, with excess cash in the system dropping back to just over 7 billion euros according to Reuters calculations.
While the ECB abandoned plans to scale back its crisis support last month, it is now back to the range of funding offerings it had before the onset of the financial crisis. Three-month loans are once 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.