* ECB refinancing and deposit rates seen unchanged this week
* December's enthusiasm for deposit rate cut erased
* Traders poised to act on any signals of future cuts
By William James
LONDON, Jan 7 A risk-hungry start to the year
means traders are not positioned for the European Central Bank
to ease lending conditions by cutting rates on Thursday, but
sensitivity to any signals on future cuts will remain high.
After a roller-coaster December, in which expectations of a
cut to the central bank's deposit rate built up and were
subsequently dashed, pricing suggests traders are betting on a
wait-and-see approach from the ECB in January.
"My feeling is that the pressure to cut has eased a bit... a
negative deposit rate is no longer priced in," said Elwin de
Groot, market economist at Rabobank in Utrecht.
"After the last meeting we saw the market positioning
themselves for one more rate cut into January. Since then the
market has come away from this view and now it is not so
strongly positioned any more for a near-term cut."
The refinancing rate at which the central bank lends money
is the main tool used to encourage bank lending and boost the
economy. But banks are already flooded with cheap ECB loans,
meaning the deposit rate charged on excess reserves has a more
significant impact on short-term interbank borrowing costs.
Forward rate agreements, used to bet on where the Eonia
overnight borrowing rate will be in the future, have recovered
from a steep fall last month that was triggered by ECB President
Mario Draghi revealing a deposit rate cut had been discussed.
Other ECB members have since played down the likelihood of a
cut, driving a rally in Eonia forwards. The contract linked to
the July ECB meeting now trades at 0.057 percent,
having hit a low of -0.054 percent in the December fall.
The ECB has repeatedly been pressed into action by Europe's
worsening debt crisis over the last three years, but has bought
some calm with its latest, as-yet untested, promise to buy bonds
issued by states that seek an official bailout.
Expectations that rates will be left unchanged after
Thursday's meeting are supported by the strong start to the year
for risky euro zone bonds after a late deal to avert a fiscal
crunch in the United States.
"Since the December meeting, the economic situation in the
euro zone has stabilised and the mood in the financial markets
has improved, especially after the agreement in the U.S. to
avoid the fiscal cliff," Barclays Capital analyst Giuseppe
Maraffino said in a note to clients.
Barclays had previously forecast a cut in January but now
expects rates to remain on hold, with the ECB leaving itself
open to a cut in the future.
Nevertheless, the fact that few are expecting a cut to
either of the bank's key rates on Thursday means markets will be
sensitive to any insight into the bank's thinking on whether
policy could loosen in the future, analysts said.
"Given the developments of the last four weeks or so, any
slightly dovish language could give the market a bit of a
turnaround," de Groot said.
That effect would be felt in both Eonia forwards,
which fall on speculation about a deposit rate cut, and a rise
in Euribor futures which also incorporate the markets
view on the refinancing rate outlook.