Money markets interbank rates seen on ice until next ecb meeting

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Interbank lending rates have edged higher after the European Central Bank frustrated rate cut bets this week but analysts expect them to hold near current levels at least until the bank's next monthly meeting. Expectations of further monetary easing in the euro zone and excess liquidity have kept the difference between the spot and the one-year overnight Eonia rates minimal. The Eonia rate curve is expected to remain broadly flat over the short-term as the potential for more monetary easing by the euro zone central bank offsets a gradual decline in excess liquidity."Any upward pressure from the pay-back of ECB loans is outweighed by the ECB's commitment to ample liquidity provision," said Simon Peck, rate strategist at RBS. Eonia forwards showing where markets expect one-year Eonia rates to be in one year's time were at 0.27 percent on Friday. That was little changed from 0.26 percent on Thursday - the day of the ECB meeting - and up from 0.21 percent a day before that.

The ECB kept interest rates steady at a record low of 0.75 percent and provided little clues on whether it was preparing to lower borrowing rates, disappointing some in the market who had anticipated a more accommodative tone. Even though excess liquidity has declined since banks began paying back their ECB crisis loans, it remains lofty at 382 billion euros and the rate at which banks return the cash has slowed.

Banks will next week repay the ECB 4.23 billion euros of two three-year loans totalling roughly a trillion euros they took a year ago, a drop in the payback rate that suggests some prefer to hold surplus cash in case financial markets clog up again."The return of Italian political risks last week creates uncertainty and against that backdrop banks would rather keep the cash than pay it back to the ECB," Peck added. Italy faces a political stalemate after inconclusive elections that some fear could unsettle financial markets.

Given the region's sluggish economic outlook, markets are likely to expect the ECB to at least signal it will eventually cut rates to stimulate the economy at its next meeting. If the ECB does not live up to those expectations, upward pressure could build on money market rates."The very front end - from the overnight to the one-year - will remain quite flat in coming weeks. There could be steepening pressures on the back of the next meeting ... if they keep rates unchanged, because most are still expecting the ECB could deliver a rate cut," said Patrick Jacq, European rate strategist at BNP Paribas. The one-year Eonia contract was trading at 0.08 percent on Friday, little changed from the day before, and compared to a spot rate of 0.06 percent.