LONDON May 2 Short-term euro money market rates
fell on Thursday after European Central Bank President Mario
Draghi said the bank was ready for a move to a negative deposit
Draghi said the ECB was "technically" ready to cut the rate
it charges banks to keep cash at the central bank overnight to
below zero - a move that would effectively penalise them for
hoarding cash and not lending it to other banks or businesses.
He said several unintended consequences of such a move were
possible, but the ECB would cope with them if it decides to act.
Euribor futures rose 3-5 ticks across the 2013 and
2014 strips, indicating expectations that the benchmark
bank-to-bank three-month Euribor rate - a gauge of expectations
of future official interest rates and liquidity conditions -
will settle at lower levels than initially thought over the
"We definitely seem to be a lot closer to going negative
than markets initially thought," said David Keeble, global head
of fixed income strategy at Credit Agricole.
"His (deposit rate) comments definitely set the cat among
the pigeons. He was quite aggressive and had a very dovish
Keeble did not expect Euribor futures to rise much further,
saying markets were likely to wait for the next inflation data
before gauging whether and when the ECB could make such a move.
Forward euro overnight Eonia rates dated for future ECB
meetings dropped by up to 3 basis points across the
same strips, with the lowest point on the curve oscillating
between October and November at around 0.03-0.04 percent.
Eonia rates have traded about 8 bps above the deposit rate
in recent months, meaning money markets are pricing in a slight
chance of a deposit rate cut in October/November.
"That makes sense. The ECB still expects a recovery in the
second half ... and if we don't see any signs of that by autumn
we could see a move in the deposit rate," said Anders Svendsen,
chief analyst at Nordea in Copenhagen.
Draghi's mention of unintended consequences also suggested
the ECB was unlikely to cut the deposit facility rate -
effectively a floor under money market rates - any time soon.
Low money market rates may reduce banks' incentive to lend
to each other. Some U.S. money market funds restricted lending
to European banks last year when talk first emerged about the
possibility of a deposit rate cut.
"I guess the ECB is still afraid of draining the money
market completely. It's worried about money market funds and
potentially about taxing the banking system, which is one way of
looking at (a deposit rate cut)," Svendsen said.