Monday, 16 November 2015 18:13
LONDON: Euro zone money markets are fully pricing in a 10 basis point cut in the ECB’s deposit rate in December, as the Paris attacks cement expectations of further monetary stimulus to shore up a fragile economic recovery.
December Eonia lending rates, a gauge of market rate expectations, were trading at about -25 basis points on Monday, compared with an overnight rate of -0.13 bps, suggesting a cut in European Central Bank’s deposit rate was fully discounted.
Money markets had already moved to price in a 10 bps cut to -0.30 percent in the past week, following dovish comments from ECB President Mario Draghi to the European parliament.
Now they are pricing in a small chance of an even deeper cut at the Dec. 3 ECB meeting.
“Even without Friday’s events markets were looking a bit weak and these events make it more likely that the ECB will ease,” said Michael Hewson, chief market analyst at CMC Markets in London. “So the big question then is, by how much?”
In remarks to European Union lawmakers on Thursday, Draghi underlined the ECB’s readiness to extend money printing, warning that a key measure of economic health — price inflation — was flagging.
While some of the short-term money market rates were at record lows, the overall moves in the interbank market were small, with Euribor futures up 0.5-1 bps higher across the curve.
“Compared with a week ago the probability has gone up and a 10 bps cut is now fully priced in by money markets,” said ING senior rates strategist Martin van Vliet.
“What was important last week was that Draghi made it clear that the ECB would implement further easing and the dramatic events over the weekend, on balance, slightly increase the odds of more easing,” he said.
