July 4, 2013 / 2:56 PM / 5 years ago

MONEY MARKETS-"So dovish" Draghi pushes short-term euro rates lower

* 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 (Reuters) - 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.

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