Euro interbank lending rates eased marginally on Wednesday due to the amount of liquidity in the banking system but markets were cautious ahead of Thursday's European Central Bank rate-setting meeting. A potent cocktail of new economic forecasts, crisis support withdrawal and the potential for tough talk on inflation makes the March policy meet one of the most important of the year.
The ECB is expected to keep interest rates on hold at 1 percent but overnight index swaps show a 25 basis point rise is almost fully priced in by the central bank's August 4 meeting, with a further hike expected by December. Data showed euro zone inflation running at a 28-month high in February, well above the ECB's target, but President Jean-Claude Trichet said last month there was not yet a threat to medium-term price stability.
The central bank's preferred measure of inflation, the five-year, five-year forward-breakeven rate, has been fairly steady around 2.5 percent this year, according to data from Credit Agricole, levels last seen around the middle of 2010.
The future path of liquidity provision will also be under close scrutiny at Thursday's ECB meeting when the bank is expected to outline plans for the withdrawal of extraordinary support measures provided to keep banks lending during the global financial crisis. European Union leaders meet later this month and are expected to agree to raise the size and scope of the euro zone bailout fund although Germany is under domestic political pressure to resist such moves. Benchmark three-month Libor rates fixed at 1.0475 percent, with equivalent dollar rates flat at 0.30950 percent.