Key sterling interbank rates slipped for the first time in three weeks on Friday after the Bank of England left interest rates unchanged but bets of a hike by mid-year capped the rally in short-term UK money markets. The BoE left main borrowing costs unchanged at a record low 0.5 percent on Thursday, easing the pressure on short-term money market rates which had risen as some investors positioned for an outside risk of an increase.
Data showing UK producer input prices rose 13.4 percent on the year in January, above forecasts for 12.6 percent, highlighted the possibility that an ongoing pick-up in inflation may require the BoE to raise rates in the coming months, some analysts said.
Short sterling futures were marginally higher across the June 2011/12 strip, keeping implied yields slightly lower but the move did not gain much traction after Thursday.
London interbank offered rates for three-month sterling were fixed lower at 0.80313 percent from 0.80500 percent, the first time it has slipped since January 25. In the eurozone, money markets took in their stride news of German Bundesbank boss Axel Weber's withdrawal from the ECB leadership contest to succeed Jean-Claude Trichet whose mandate ends in October. Weber, a known hawk within the ECB, was seen as one of the frontrunners to succeed Trichet.
Benchmark three-month euro Libor rates were set slightly lower at 1.04625 percent from 1.04813 percent while equivalent the equivalent Euribor rate was at 1.093 from 1.094 percent previously. The liquidity-dependent overnight rate remained above the ECB's main refinancing rate, fixing at 1.023 percent. Banks scaled down their intake of 1-week and 1-month funding by almost 70 billion euros this week.