Interbank euro funding costs rose on Thursday and could shift if European Central Bank chief Jean-Claude Trichet surprises with plans for more liquidity provision or news on bank stress tests. Trichet was due to begin a news conference at 1230 GMT after the bank held interest rates at 1 percent, as expected.
The Bank of England also kept interest rates on hold at a record low 0.5 percent. Stress tests will be carried out on 91 European banks later this month, with markets keenly seeking further details on how rigorous the tests will be. Analysts said that based on the limited information provided by regulators, the tests were not seen as onerous.
Trichet was not expected to elaborate on the conditions of the test, but any further information could move money market rates.
If the market takes the view that what they're going to test for is going to be more conclusive in providing evidence, then that may be seen as a reason for rates to come down, said David Owen, chief European financial economist at Jefferies.
The London interbank offered rate (Libor) for three-month euros was fixed on Thursday at 0.75250 percent EUR3MFSR=,rising by more than 1 basis point from Wednesday's fixing to a level last seen in early September 2009.
LIQUIDITY PROVISION After the relatively smooth expiry of a 442 billion euro 12-month ECB tender last week, analysts were not anticipating the announcement of any changes to the central bank's schedule of unlimited liquidity withdrawal.
The ECB has previously said it will continue to provide banks with unlimited one-week funding until at least October, and full allotment three-month tenders until September.
The ECB was seen as more likely to focus on the fact that banks had sent a positive signal by allowing liquidity to drain from the system, indicating they were less reliant on ECB funds than some in the market had feared.
However, the rise in interbank rates following the withdrawal of liquidity was a sign of apprehension in wholesale markets and not necessarily positive, said Padhraic Garvey,strategist at ING in Amsterdam. The ECB's refi rate at 1 percent is a penal rate on any collateral, and every time wholesale rates rise it makes this rate less penal relative to better collateralised alternatives,which in turn creates a distortion in the market, he said.
The future of the ECB's bond-buying programme was also set to come under scrutiny, with any hint that purchases may extend into commercial paper likely to ease tension over banks' ability to raise funds.
With the end of the covered bond purchase programme having been reached, it would make sense to keep the option available of continuing purchases in this market via the Securities Markets Programme, said Benjamin Schroeder, strategist at Commerzbank in Frankfurt. This definitely should ease (interbank) pressure because you would have a backup buyer for your commercial paper.