Money markets short term rates rise as bets on ecb cut fall flat← Homepage
* Money market curve shifts higher after ECB rates unchanged* Lack of more-dovish signals pushes some to close positions* LTRO repayments eyed for fresh guidance on liquidity drainBy William JamesLONDON, March 7 Interbank borrowing rates inched higher on Thursday as traders who had positioned for the European Central Bank to signal fresh monetary easing found little support from the bank's monthly news conference. Money market rates rose slightly as those who had wagered that Italy's electoral crisis and worsening economic data could push the central bank to signal rate cuts in the near future, looked to close out their positions.
A small minority of banks had forecast the ECB would cut rates in March, but the central bank said its main charge on borrowing would remain unchanged at 0.75 percent. The subsequent news conference offered little in the way of new signs the ECB was preparing to lowering borrowing rates."It seems the markets have been caught a bit on the wrong foot," said Anders Svendsen, chief analyst at Nordea in Copenhagen. "All in all, Draghi remains dovish but more weakness is needed to make the ECB cut rates."One-year fixed term Eonia rates, which reflect the expected average cost of overnight borrowing over the life of the contract, rose by around 2 basis points to 9.5 bps.
Similarly, forward Eonia rates rose and Euribor futures <0#FEI:> fell - both indications that borrowing costs in the wholesale money markets which underpin lending rates throughout the economy, will be slightly higher than expected. However, the limited scale of the moves shows both that expectations of fresh signals had been modest going into the meeting, and that the central bank had not ruled out a cut in the future.
"The reaction in Eonia is, given how much had built up in previous weeks, still relatively moderate," said Benjamin Schroeder, strategist at Commerzbank. "Draghi left the door open (for a rate cut) here, he certainly didn't close it."Gauging the exact level of rate cut expectations is complicated by the huge weight of excess liquidity in the eurosystem, which pushes short-term borrowing costs artificially lower. This makes it hard to distinguish whether moves in money market rates reflect anticipated changes in the level of liquidity or in the market's expectations on the timing of ECB rate moves. Market participants looking to trade short-term rates will look closely at data due from the ECB on Friday on how much liquidity banks will return to the central bank, in an effort to determine the speed at which cash surpluses will fall. A Reuters poll on Monday showed traders expect repayments worth 8 billion euros, adding to the 225 billion euros repaid since the three-year loans became eligible for return in January.