Money markets row back on expectations of further ECB easing

LONDON Thu Dec 5, 2013 11:16am EST

LONDON Dec 5 (Reuters) - Money markets all but gave up expectations of further European Central Bank monetary easing on Thursday after ECB President Mario Draghi gave no hint that action was imminent.

Some in the market had expected a signal of easier policy but a rise in short-term money market rates suggested such a step was not seen likely.

Draghi said after a policy meeting that inflation would stay well below target for the next two years and that the ECB stood ready to act and to lift the economy if needed. But, while there had been a brief discussion of negative deposit rates, no interest rate cuts had been proposed.

He told a news conference the ECB would offer new long-term loans to banks only if it felt confident the money would flow into the economy. He was comfortable with the current level of money market rates, which indicated the bank's promise to keep policy rates low for a prolonged period was working.

"I couldn't see anything (in Draghi's speech) which changes what he said before. I didn't see any nuance. We're stuck," said David Keeble, global head of fixed income strategy at Credit Agricole in New York.

"This has certainly reduced the probability (of more ECB easing) quite drastically."

Forward euro zone overnight Eonia rates dated for future ECB meetings rose by up to 3 basis points to 0.11-0.13 percent [ECBWATCH}, in line with the spot Eonia rate.

When forward rates trade lower than the spot rate it is usually a sign that the market expects more easing. Eonia forwards now suggest markets expect the ECB to hold fire for the foreseeable future.

The one-year, one-year forward Eonia rate, which shows where markets see one-year Eonia rates trading in one-year's time , rose 5 bps to 0.24 percent, a level last seen before the ECB cut its main refinancing rate to 0.25 percent last month.

Trade in the instrument has grown this year as it is seen as encompassing the period covered by the ECB's forward guidance on interest rates. The fact that it rose close to the key ECB rate also suggests markets expect the ECB to stay on hold for the next two years.

"The market expected a bit more, they are a bit disappointed," said Holger Sandte, chief European analyst at Nordea Markets in Copenhagen. "But that can change with the (next) Draghi speech or with new data."

Sandte said that despite looking comfortable with the status quo, the ECB could still consider options such as lower reserve requirements, looser rules on what collateral can be used or conditional, cheap long-term unlimited loans to banks.

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