Euro-priced interbank rates rose to 21-month peaks on Thursday and are expected to grind higher after higher-than-forecast inflation data cemented bets of a European Central Bank interest rate hike next week. Money markets were little moved by news of disagreement among ECB policymakers on a new funding facility to help Ireland resolve its bank crisis as it unveiled stress tests for the sector, with most market observers expecting detail from the central bank's policy meeting next Thursday.
A 2.6 percent figure for eurozone inflation in March, above expectations for 2.4 percent, bolstered the view the central bank will raise interest rates for the first time since July 2008. Euribor interest rate futures from September out to the 2012 curve fell, pushing their implied yield up while two-year German bond yields rose to their highest since March 4 at 1.813 percent. London interbank offered rates for three-month euros fixed up at 1.18000 percent, their highest since late June 2009. Equivalent Euribor rates also fixed at a new 21-month high at 1.239 percent.
Money markets were pricing in three rate hikes by the end of the year with an outside chance of a fourth, with the rate increases expected to be spaced out over the remaining quarters. Meanwhile, money markets took in their stride news that the ECB would not announce plans on Thursday for a new scheme to ensure troubled banks have access to medium-term liquidity. Most in the market saw it as step towards monetary policy normalisation and expected it to have limited impact on money markets.