* ECB says rates to stay at record lows for extended period
* Euribor futures rally, Eonia rates dip
* Money markets not pricing rate cuts at current levels
By Marius Zaharia
LONDON, July 4 Euro zone money market rates fell
on Thursday after European Central Bank President Mario Draghi
said benchmark interest rates will be kept at record lows or cut
further for an extended period.
Draghi's message was a shift from the bank's previous policy
of never precommitting. He also said the bank could consider
cutting its deposit rate - which would effectively mean charging
banks for parking money, since the rate is already at zero.
Money market rates fell back to levels seen last month
before the Federal Reserve laid down plans to reduce its
monetary stimulus. Further falls would mean pricing in a chance
of rate cuts and would be data-dependent, analysts said.
"He was so dovish today that even moderate disappointment
(on future economic data) would lead to market speculation about
rate cuts," said Anders Svendsen, chief analyst at Nordea.
Euribor futures rose by up to 18 ticks across the
2013-2015 strip, indicating expectations that the benchmark
bank-to-bank three-month Euribor rate - a gauge of
expectations of future official rates and liquidity - will
settle at lower levels than initially thought over the period.
The ECB's main refinancing rate is a record low 0.5 percent.
The December 2013 Euribor, the most traded contract
on the strip, rose 7 ticks to 99.72, implying investors expect
the Euribor rate to settle at 0.28 percent at the end of the
year, compared with expectations of 0.35 percent on Wednesday.
The underlying three-month Euribor rate settled at 0.222
percent on Thursday.
Forward overnight Eonia rates dated for future
ECB meetings dipped. The January 2014 Eonia rate was last 0.10
percent, some 4 basis points lower than before Draghi's speech.
With forward rates still higher than the spot Eonia rate
which settled at 0.082 percent on Wednesday, it is unlikely that
markets are pricing in a cut in any of the ECB rates.
"However, people may also be expecting excess liquidity (in
the banking system) to dry up and this should influence Eonia
rates upwards," ICAP strategist Philip Tyson said.
"The risk still is that we see further falls (in Eonia
rates), particularly if we get bad data."
Excess liquidity has halved this year as banks
have been paying back some of the cheap three-year loans taken
from the ECB in December 2011 and February 2012.
Simon Smith, chief economist at FXPro, said money market
rates were unlikely to fall much further in the near term
because a deposit rate cut remained unlikely.
"It's likely that the ECB is hoping forward guidance would
do the job intended by a cut in the deposit rate without the
negative repercussions it would entail," Smith said.