LONDON, Aug 22 (Reuters) - Euro zone money market rates rose on Thursday on forecast-beating business surveys and expectations U.S. monetary stimulus would be trimmed, raising questions about the effectiveness of the ECB’s forward guidance.
The European Central Bank has promised to keep interest rates at record lows for a prolonged period or even cut them further in a bid to prevent money market rates rising as a result of the Federal Reserve’s planned stimulus withdrawal.
But the improving economic outlook, reinforced by surveys showing on Thursday the bloc’s business activity picked up this month more quickly than expected, is raising doubts about the ECB’s stated aim to inject a “downward bias” on interest rates.
Euribor futures over the 2013-2016 period were up to 6 ticks lower, with the longer-dated contracts underperforming in a sign markets were pricing in a greater chance ECB rates would rise sooner than previously expected.
The fall in Euribor futures indicated the underlying three-month bank-to-bank Euribor rate - a gauge of official rate expectations - would rise more than previously thought.
The December 2015 Euribor future was 5.5 ticks lower at 98.89 percent, reflecting expectations the Euribor rate would settle at 1.11 percent in that month, 5.5 basis points higher than indicated on Wednesday.
“The better macro data in the euro zone region has persisted, particularly with today’s PMI report ..., which has maintained steepening pressure on the Euribor strip,” ICAP strategist Philip Tyson said.
The projected December 2015 Euribor rate was the highest since late June, just before the ECB took the unprecedented step of introducing forward guidance on interest rates.
The forward euro zone overnight Eonia rate market has shifted similarly. One-year, one-year Eonia forwards, which show where one-year Eonia rates are expected to be in a year’s time , rose as much as 4 bps on Thursday to 0.477 percent, the highest since June 21.
“The ECB’s forward guidance is rather soft. It has become more difficult for the ECB to provide confidence that rates will remain low,” Commerzbank rate strategist Benjamin Schroeder said, also pointing to an expected tightening of monetary conditions globally due to the Fed outlook.
Minutes of the Fed’s July meeting on Wednesday could not shake expectations the U.S. central bank will start to reduce the pace of asset purchases from next month.
“People expect the ECB will do something against this tightening (in money market conditions),” Schroeder said.
“But if they do something they have to justify why they do it against the backdrop of an improved economic outlook so I‘m not too sure they will.”
ICAP’s Philip Tyson said it was likely that the ECB would stick to verbal intervention at its September meeting. Another incentive for the bank to keep monetary policy as loose as possible is keeping peripheral debt markets stable.
Low money market rates make peripheral debt more attractive due to the yield differential and are crucial to fostering the growth rates that will enable them to reduce big debts.
“It’s important to remember that the latest (economic) improvement was driven by the relatively healthy core economies and most of the peripheral economies continued to contract,” Tyson said.
“(On) the latter, even a return to growth, unless it is very rapid, will not ease their debt burdens in any meaningful way.”