LONDON Dec 5 Money markets all but gave up
expectations of further European Central Bank monetary easing on
Thursday after ECB President Mario Draghi gave no hint that
action was imminent.
Some in the market had expected a signal of easier policy
but a rise in short-term money market rates suggested such a
step was not seen likely.
Draghi said after a policy meeting that inflation would stay
well below target for the next two years and that the ECB stood
ready to act and to lift the economy if needed. But, while there
had been a brief discussion of negative deposit rates, no
interest rate cuts had been proposed.
He told a news conference the ECB would offer new long-term
loans to banks only if it felt confident the money would flow
into the economy. He was comfortable with the current level of
money market rates, which indicated the bank's promise to keep
policy rates low for a prolonged period was working.
"I couldn't see anything (in Draghi's speech) which changes
what he said before. I didn't see any nuance. We're stuck," said
David Keeble, global head of fixed income strategy at Credit
Agricole in New York.
"This has certainly reduced the probability (of more ECB
easing) quite drastically."
Forward euro zone overnight Eonia rates dated for future ECB
meetings rose by up to 3 basis points to 0.11-0.13 percent
[ECBWATCH}, in line with the spot Eonia rate.
When forward rates trade lower than the spot rate it is
usually a sign that the market expects more easing. Eonia
forwards now suggest markets expect the ECB to hold fire for the
The one-year, one-year forward Eonia rate, which shows where
markets see one-year Eonia rates trading in one-year's time
, rose 5 bps to 0.24 percent, a level last
seen before the ECB cut its main refinancing rate to 0.25
percent last month.
Trade in the instrument has grown this year as it is seen as
encompassing the period covered by the ECB's forward guidance on
interest rates. The fact that it rose close to the key ECB rate
also suggests markets expect the ECB to stay on hold for the
next two years.
"The market expected a bit more, they are a bit
disappointed," said Holger Sandte, chief European analyst at
Nordea Markets in Copenhagen. "But that can change with the
(next) Draghi speech or with new data."
Sandte said that despite looking comfortable with the status
quo, the ECB could still consider options such as lower reserve
requirements, looser rules on what collateral can be used or
conditional, cheap long-term unlimited loans to banks.