MONEY MARKETS-Key euro interbank rates inch up; ECB exit eyed

* Term euro interbank rates edge higher

* ECB expected to stick with gradual exit plan

* Overnight EONIA falls but seen back up by year end

By Emelia Sithole-Matarise

LONDON, Nov 1 (BestGrowthStock) – Benchmark euro bank-to-bank
borrowing costs edged up on Monday with the European Central
Bank expected to stick to plans to gradually wind up
extraordinary liquidity measures at this week’s policy meeting.

Analysts expect benchmark interbank rates to grind higher in
coming days before being capped around the ECB’s key refinancing
rate of 1 percent, which the central bank is expected to
maintain after Thursday’s policy meeting.

London interbank offered rates for three-month euros
(EUR3MFSR=: ) fixed at 0.98875 percent, up from 0.98688 percent,
but very short-dated rates eased. For latest Libor fixings see
[ID:nEAP000029]

The three-month Euribor rate (EURIBOR3MD=: ) — traditionally
the main gauge of unsecured interbank euro lending and a mix of
interest rate expectations and banks’ appetite for lending —
edged up to 1.046 percent from 1.045 percent. It resumed rising
after a brief pause on Friday, which marked the first time in
more than a month that it had not risen.

“One of the drivers has been the removal of excess liquidity
in the system but with Libor rates now pretty much flat to
overnight rates and to policy rates, that’s largely run its
course. Maybe another 10 basis points but it won’t go much
further than that,” said Mark Schofield, a strategist at Citi.

Interbank rates have been climbing since banks slashed their
consumption of ECB funding in a string of key lending operations
at the end of last month. [ID:nLDE68T13O]

The increase was largely seen as a step towards normalistion
in money markets as bank-to-bank three-month lending rates
traditionally sit just above the ECB’s headline rate.

“The premise is that we continue to be in exit strategy
mode. This is pretty much what the ECB has in mind so that
should be the case that the one-month forward rates continue to
rise,” said Alessandro Tentori, a rate strategist at BNP.

Schofield said regulatory changes in the banking sector were
also inflating demand for term-funding and keeping the money
market curve steep.

Overnight EONIA (EONIA=: ) fell to 0.77 percent from 0.779
percent, maintaining its easing trend after higher-
than-expected demand by banks at an ECB three-month tender last
week boosted excess cash in the euro zone banking system by
almost 20 billion euros.

A weekly ECB tender due on Tuesday is seen doing little to
change excess liquidity in the system. The central bank is
expected to allot 180 billion euros at the seven-day refinancing
operation, according to a Reuters poll released on Monday.
[ID:nLDE6A00YZ]

“We could have a situation if the poll is correct where
excess liquidity drops by about 3 billion euros, which is
marginal, and the market stabilises with Eonia fixings around
these levels may be even lower … until next Wednesday when we
have the one-month tender,” Tentori said.
(Editing by Susan Fenton)

MONEY MARKETS-Key euro interbank rates inch up; ECB exit eyed