LONDON Nov 27 Money markets are still pricing
in some chance that the European Central Bank will cut deposit
rates into negative territory, even though that possibility did
not feature at its last rate-setting meeting.
But ECB President Mario Draghi also said on Nov. 8 the euro
zone economy shows little sign of recovering before the end of
the year, leaving open the possibility of an interest rate cut
in the months ahead.
Excess liquidity in the financial system and the ECB's
non-standard measures have made it hard to use money market
instruments as a gauge of interest rate bets, analysts say.
But the fact that overnight Eonia rates are
currently at 7 basis points - offering a spread over the deposit
rate at zero - and the fact that Eonia forwards
suggest they could fall to around 3 basis points in March next
year shows that possibility still exists, analysts say.
"There is some probability priced in the forward on the
Eonia that the deposit facility could be cut. This explains why
Eonia is seen below the current level," said Giuseppe Maraffino,
a fixed-income strategist at Barclays.
Key Euribor bank-to-bank lending rates steadied, finding a
firmer floor as a year-long downtrend under the weight of excess
liquidity in money markets fades.
Three-month Euribor rates, traditionally the
main gauge of unsecured bank-to-bank lending, were unchanged at
Barclays expects the three-month Euribor rate to stabilize
around this level. But it says the risks are skewed to the
downside, "as rising expectations of a possible drop of the
deposit rate into negative territory should push EONIA rates
down, thus creating room for a further decline in the Euribor."
Banks demand a bigger premium to lend to each other over
three months than overnight to compensate for the greater risk
attached to lending for a longer time.
Benjamin Schroeder, a strategist at Commerzbank, says the
bank does not see a deposit rate cut on the horizon but also
would not bet against a further fall in the Eonia rates.
"We wouldn't now start engaging in receiver positions here -
betting on higher Eonia rates in the near term," he said.