June 20, 2012 / 3:01 PM / 7 years ago

MONEY MARKETS-Interbank rates fall on bets of c.bank stimulus

* Three-month sterling Libor falls further after minutes

* Euribor rates within whisker of record lows

* Cut in ECB deposit rate seen more likely than refi rate

By Ana Nicolaci da Costa

LONDON, June 20 (Reuters) - Interbank lending rates in sterling and in euros continued to fall on Wednesday on growing expectations of further support from major central banks around the world to counter the fallout from the euro zone’s debt troubles.

The Bank of England looked to be close to launching a new round of monetary stimulus because of the worsening euro zone crisis, according to minutes of its last policy meeting, which showed officials split 5-4 on the move, with Governor Mervyn King in favour.

The minutes helped take three-month sterling Libor to its lowest since September 2011, after the rate tumbled last week when the BoE announced a raft of measures to boost liquidity in the banking system and hinted that more quantitative easing gilt purchases could be on the cards.

Three-month Euribor rates were only a whisker away from record lows after recent comments from European Central Bank officials prompted markets to price in the possibility of more rate cuts.

“Barring a massive rebound in retail sales tomorrow and better PMIs, above all, I think the market is going to be heavily discounting more QE (quantitative easing in the UK) in July,” Ma r c Ostwald, strategist at Monument Securities, said.

“For the euro zone, I think really the jury is still out ... The talk that ... reducing the deposit rate to zero is no longer a subject which is a taboo at the ECB, would seem to suggest that a few people will be looking for the ECB to cut rates in July. But what difference that’s going to make (I don’t know).”

ECB policymaker Ewald Nowotny said earlier this month the bank has the ability to cut interest rates if the euro zone economy continues to deteriorate and could even slash the rate that controls money market rates to zero.

That along with recent comments from ECB President Mario Draghi that the euro zone economy faces serious risks and no inflation threat has heightened expectations the ECB could cut interest rates or take policy action soon.

Reflecting this sentiment, three-month Euribor rates traded at 0.657 percent, unchanged from the previous day’s level which was the lowest since April 2010. Euribor rates hit a record low of 0.634 percent in March of that same year.

Three-month sterling Libor edged lower to 0.91775 percent from 0.92150 percent the previous session, after a sharp fall last Friday.


Eonia forwards showed that markets were expecting the Eonia overnight rate to trough at between 0.224 percent and 0.174 from August, suggesting the market was discounting some possibility of a deposit rate cut.

The rate offered by the ECB’s deposit facility is 0.25 percent and is seen as a floor for overnight Eonia rates which last traded at 0.33 percent.

“A deposit facility rate cut is (what the market is) expecting now. If you look at where money markets are trading, it’s now expecting Eonia fixings below the 20 basis points level, 15 bps below current Eonia fixings. That would only be possible with the cut of the deposit facility rate,” Benjamin Schroeder, rate strategist at Commerzbank, said.

It was hard to gauge market expectations for a deposit rate cut because the ECB could opt for a smaller reduction to say 0.125 percent or a bigger cut to zero percent, he said.

But the market was pricing in a 40 percent chance of a deposit rate cut to zero percent in July and a 50-60 percent of this happening in August, he added.

The reading varied widely between analysts.

Simon Peck, rate strategist at RBS, said the market was pricing in a 25 percent chance the ECB would cut its deposit rate to zero in September and only an 8 percent chance of such a move in July.

The Federal Reserve on Wednesday may also opt to launch a new round of monetary stimulus.

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