London - Investors are no longer
expecting a rate rise from the European Central Bank by March
2018, money market pricing suggests, marking a sharp reversal in
expectations for higher interest rates from just a month ago.
ECB policymakers' comments playing down the scope for
near-term changes to monetary policy, along with falling
inflation expectations, explain the reassessment.
Money market rates tell the tale. Forward Eonia bank-to-bank
rates the best gauge dated for the ECB meeting on March 8
next year stand at around minus 0.34 percent, two basis points
above the Eonia spot rate of minus 0.36 percent.
Such a gap indicates markets are pricing in just a 20
percent chance of a 10 basis point hike in the ECB's minus 0.40
percent deposit rate by next March.
That's a sharp contrast to last month, when investors
ratcheted up rate-hike expectations after the ECB at its March 9
meeting signalled a diminishing urgency for more policy action.
Soon after, some policymakers even raised the prospect of
raising rates before quantitative easing ends.
As a result, markets moved swiftly in March to fully price
in a rate hike in the first quarter of 2018 and as much as an 80
percent chance of a rate rise in December, when the ECB's
asset-purchased scheme is scheduled to end.
Read also: Dollar rides high on Fed rate hike expectations
Now, markets have also unwound expectations for a rate rise
by year-end with Eonia forward rates dated for the December 14
meeting indicating a less than 20 percent chance of a move.
"The market has pretty much priced out everything," said
Peter Schaffrik, head of European rates strategy at RBC Capital
Markets. "It is a combination of the rhetoric, which has played
a crucial role, but also falling inflation expectations."
Prospects for the euro zone economy have improved but the
time to withdraw support has not yet come, three ECB rate
setters said on Wednesday, days before a tense French
presidential election and the ECB's own policy meeting.
Inflation Blip
Data meanwhile has shown inflation in the euro zone has
slowed from four-year highs of 2 percent hit in February.
A long-term gauge of euro zone inflation expectations
tracked by the ECB, the five-year, five-year breakeven forward,
has fallen in recent weeks to stand at around 1.60 percent below the ECB's near-2 percent target.
Disappointing US economic data and signs that the Trump
administration will struggle to push through tax cuts have also
quelled expectations of faster inflation in the United States.
That has had a dampening impact on rate-hike expectations in
the euro zone as well, analysts said.
The money market curve has flattened and two-year Eonia
money market swap rates, also viewed as an indicator
of ECB monetary policy, have fallen.
In the United States, the Federal Reserve hiked rates on
March 15 after a string of hawkish comments from officials
triggered a rapid turnaround in market expectations for a move
then.
The fact that in recent weeks rate expectations in Europe
and the United States have swung around rapidly highlights
market sensitivity as central banks move towards normalising
ultra-easy monetary policies put in place after the financial
crisis as economic growth improves.
"Markets are quite sensitive now that we are running towards
the end of (asset-purchasing)," said ING rates strategist
Benjamin Schroeder.
REUTERS