The euro money market curve steepened, with very near-term

MONEY MARKETS-Euro interbank rates up but to ease on excess cash
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* Euro interbank rates seen easing next week on excess cash * Euribor curve steepens * Eonia edges lower but still at elevated levels By Emelia Sithole-Matarise LONDON, Oct 28 (Reuters) - Key bank-to-bank euro borrowing
costs rose to fresh 15-month highs on Thursday but are largely
expected to ease over coming weeks on increased excess cash in
money markets after a European Central Bank liquidity injection.
Overnight Eonia rates edged lower to 0.849 percent after
banks took up a higher-than-expected 42.5 billion euros at the
the ECB's first tender of 'indexed' 3-month loans on Wednesday,
as the recent rise in open money market rates made the offering
more appealing. The euro money market curve steepened, with very near-term
rates pressured by the excess liquidity, estimated by BNP
Paribas strategists at 53 billion euros. 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 --
rose to 1.045 percent from 1.043 percent. London interbank offered rates for 3-month euros EUR3MFSR=
climbed to 0.98500 percent from 0.97813 percent. For latest
Libor fixings see [ID:nEAP000027] Overnight EONIA EONIA= is still 40 basis points higher
than at the same time a month ago but the excess liquidity is
expected to drive it moderately lower over the remainder of the
ECB's reserve maintenance period. "The fact that liquidity rose roughly by 20 billion euros
yesterday helped Eonia to stabilise at very elevated levels ...
More significant easing could take place next week as we go
closer to the end of the reserve period and as we have excess
liquidity," said Patrick Jacq, a strategist at BNP Paribas. Interbank rates have been surging 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 seen as a step towards normalisation in
money markets as bank-to-bank 3-month lending rates
traditionally sit just above the ECB's headline rate. "Liquidity is normalising, but will not competely normalise.
There are some banks that need the ECB. Excess liquidity will
remain high enough that the Refi-Eonia basis does not return to
pre-crisis levels of Eonia 6 basis points over Refi," said Fred
Goodwin, a strategist at Nomura. "How high can it go? That is less clear, but more clear is
that volatility in front Eonia is likely to be dampened down
barring the curve pricing in a Q1 rate hike, which we see as
unlikely," he said in a note. ECB Executive Board member Juergen Stark said on Thursday
money markets were continuing to heal but the process was not
yet complete, adding there was an "acceptable situation where
the volume of our refinancing operations has decreased from 800
billion euros to 400 billion euros," he told a conference. ECB policymakers are expected to decide in December or
January whether to press on with scaling back its unrestricted
loan offerings and markets are increasingly betting they will
put a limit back on 3-month loans.
An ECB survey released earlier on Thursday provided another
positive sign for ECB policymakers, showing fewer banks
tightened their credit standards for coporate loans in the third
quarter than in the second. It also showed that troubles banks experienced in obtaining
wholesale funding in the second quarter had eased after the most
acute stage in May of the euro zone sovereign debt crisis.
[ID:nLDE69R0PM]
(Editing by Catherine Evans)