* Markets price a steady ECB
* Effect of any surprise rate cut seen limited
* Focus shifting to excess cash repayments
By Kirsten Donovan
LONDON, Nov 5 Euro zone money markets aren't
expecting the ECB to alter policy this week, leaving the focus
on whether banks will start next year to repay excess cash they
have borrowed from the central bank or just keep hoarding it.
Markets have all but priced out the possibility the European
Central Bank will cut the rate it pays to deposit cash overnight
from its current zero percent and economists polled by Reuters
expect the main refinancing rate to be kept at 0.75 percent on
ECB officials have indicated the central bank doubts another
rate cut would have much impact on the economy,
leaving the focus on unconventional measures such as the cheap
long-term liquidity it has pumped out over the past year and the
bank's new bond-buying option.
"You can understand how the market is interpreting that it
won't be conventional measures that will be the way forward for
boosting confidence ... and is moving away from expecting
further rate cuts," said Credit Agricole rate strategist Orlando
The euro zone debt crisis has abated since the ECB detailed
a plan to buy the bonds of struggling euro zone countries if
they ask for aid. Spain is seen as the most likely candidate
although it has yet to make a move.
Forward overnight Eonia rates - which reflect expectations
of where the deposit rate will be set - are at most just a
couple of basis points below current levels, indicating markets
see the rate staying at zero percent.
"We think the ECB will shy away from cutting the deposit
rate into negative territory," said Commerzbank rate strategist
Although a negative deposit rate may spur banks to lend
more, it deters money market funds and some, such as BlackRock
Inc - the world's largest money manager - have restricted
investor access to European funds.
It is, however, much harder to measure expectations of a
refinancing rate cut because the near 700 billion euros of
excess cash banks are currently holding distorts
the traditional calculations used before the financial crisis.
Even if the ECB does surprise on Thursday by cutting the
refinancing rate, reaction in money markets would likely be
somewhat subdued with overnight rates pinned by deposit rate
Euribor interbank lending rates could fall further, analysts
said, but the move may be limited with the spread over
equivalent maturity Eonia rates having already collapsed to just
10 basis points - nearing levels seen before mid-2007. Eonia
rates in theory strip out the risk of a lender or borrower
The three-month Euribor rate resumed its
downtrend on Monday, inching down to 0.196 percent, but has
shown signs of bottoming out with unchanged fixings late last
With little prospect of rate cuts, markets have turned their
attention to how much of their excess cash - borrowed at
three-year tender operations in December and February - banks
will repay with some estimates putting the figure at 200 billion
"Looking at forward Eonia rates, markets don't expect an
amount of liquidity to be drained that will have an impact on
rates," said Commerzbank's Schroeder.
"It's only once excess liquidity drops below 100 billion
euros that you see an impact on the Eonia fixings," he added.