Euro interbank lending rates rose on Monday with a larger-than-expected jump in euro zone
inflation adding to speculation that the European Central Bank may raise interest rates in coming months.
Money market rates have been marching higher over the last two weeks on firming expectations of ECB rate rises after bank President Jean-Claude Trichet talked tough on rising price pressures at the bank's January meeting. A first rise in the ECB's 1% refinancing rate is now
priced in by September with a further rise before year-end, according to BNP Paribas.
Euro-zone inflation jumped more than expected in January according to first estimates, rising to 2.4% -- well above the European Central Bank's target rate of close to but just below 2%.
A gauge of long-term euro-zone inflation expectations rose to within a whisker of its highest level in more than two years. The French 10-year breakeven rate (BE), the yield spread
between inflation protected French government bonds and equivalent nominal bonds rose
to 2.19%, its highest level since September 2008.
But the ECB's preferred measure of inflation expectations, the five-year, five-year forward breakeven rate, at 2.43% was only at its highest since mid-2010.
Benchmark three-month euro Libor rates were fixed almost two basis points higher at 1.02375%, their highest since July 2009.
Equivalent overnight rates jumped 27 basis points to 1.23%, with month-end lending restrictions
exacerbated by the lack of excess liquidity in the banking system. The excess, or amount of liquidity above what the banking system needs, is at its lowest levels since the start of the
financial crisis in late 2008.
The overnight Eonia rate had eased at Friday's fixing helped by an increase in banks' take-up of three-month ECB funds last week and is seen falling further into the end of the central bank's reserve maintenance period over the next week. Forward market rates reflect expectations that Eonia, which is driven by the amount of excess liquidity in the banking sector, will normalise, or rise above the current 1% refinancing rate, by June's ECB meeting.
