* ECB disappoints some with no hint of imminent easing
* Short-term euro zone money market rates rise
* Traders push back bets on ECB easing to later this year
* German 10-year yields rise to one-week high
By Emelia Sithole-Matarise
LONDON, Feb 6 The euro hit a one-week high while
top-rated euro zone government bond yields and money market
rates rose on Thursday after the European Central Bank gave no
hint of imminent monetary policy easing.
The market had been expecting a strong signal of further
policy stimulus from the ECB after a surprising fall in euro
zone inflation to 0.7 percent, well below the bank's target of
nearly 2 percent, and with money markets volatile as excess cash
in the system dwindles.
ECB President Mario Draghi said the bank held interest rates
steady at a record low of 0.25 percent on Thursday because it
needed to acquire more information.
While reiterating that the ECB remained ready to act, he
said there was no discussion over suggestions the bank stop
draining from bond markets cash equal to its crisis-era bond
purchases every week to boost liquidity, disappointing those in
the market who had expected such a move.
Money market rates implied by Euribor futures in
2014 to 2016 rose by 3 to 6 basis points, while German two-year
bond yields jumped 6 bps to 0.14 percent, their
highest in a week. German 10-year yields, the
benchmark for euro zone long-term borrowing costs, were up 6.5
bps at 1.61 percent.
"The market went a bit too far over the last few weeks in
expecting something from the ECB so the negative reaction is
disappointment but we still think the ECB will deliver," said
BNP Paribas strategist Patrick Jacq.
In the forward interest rate market, euro
overnight lending rates for this year rose by up to 3
bps after Draghi's comments. Notably, March Eonia was in line
with recent spot Eonia fixings around 0.16 percent, up from 0.13
percent before Draghi spoke, reflecting scant expectations of a
rate cut next month.
However, May to November rates were below the spot rate,
around 0.11 percent, as traders pushed back predictions for
further action later in the year.
Some in the market say a fresh spike in money market rates,
at which banks lend to each other and which set the baseline for
the cost of lending across the economy, after Thursday and
against a backdrop of shrinking excess liquidity could still
force its hand in March.
The ECB wants to prevent such a rise in short-term rates
because that would effectively tighten monetary conditions,
putting pressure on economic growth and potentially pushing the
euro zone's already sub-target inflation even lower.
"Overall, the ECB is behind the curve and we think the
market will remain convinced the ECB is locked into low rates
and can cut the refi rate again," said strategists at RBS, who
had expected a cut in the bank's refinancing rate on Thursday.
The euro rose to a one-week high against the dollar
of 1.3619 and a 2014 high against the British pound
after the ECB press conference.
The single currency's correlation with Eonia has tightened
in the past few weeks, highlighting how short term rates will be
key drivers of the euro in coming weeks.
"The fundamental outlook for the euro zone remains
challenging and disinflation could worsen from here not least
because of persistent euro resilience," said Valentin Marinov,
currency strategist at Citi.
"Renewed escalation of money market tensions could keep
markets betting on more (conventional and unconventional) ECB
measures before long."