Key euro-priced bank-to-bank lending rates hit 22-month highs on Friday, a day after the ECB began what is expected to be a series of hikes and as excess money market liquidity drained to its lowest since mid-2009. The ECB raised euro zone interest rates by a quarter of a percent to 1.25 percent on Thursday, ending almost two years of record low interest rates.
Two thirds of the 62 economists polled by Reuters after the hike, which until last month would have shocked experts, expect another rate rise by July at the latest. Expectations of policy tightening and a bank-led reduction in excess money market liquidity have been the main drivers behind a 25 percent rise in bank-to-bank lending rates since the start of the year. 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 1.294 percent from 1.280 percent on Thursday, the highest level since May 2009.
Six-month rates climbed to 1.599 percent from 1.585 percent, longer-term 12-month rates rose to 2.057 percent from 2.042 percent, while shorter-term one-week rates jumped to 1.030 percent from 0.912 percent. With the interest rate hike not officially taking effect until Tuesday, EONIA overnight interest rates fixed slightly lower on Thursday at 0.554 percent.
Excess liquidity in the money market is currently around 12 billion euros, according to Reuters calculations, the lowest level since June 2009, just before the ECB injected the first of its unprecedented and hugely popular 1-year liquidity bombs.
Last month the ECB left all its liquidity operations at full allotment for at least another three months, putting its exit strategy from stimulus measures on hold for the second quarter running. It is already back to its pre-crisis range of funding operations, however. Three-month loans are 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.
Last week it also threw a lifeline to Irish banks after stress tests revealed a 24 billion euro hole in the sector's capital. It said it would no longer insist on minimum credit ratings for Irish sovereign debt, or for debt guaranteed by the Irish government, when accepting it as collateral in money market operations.