Investors say forget about rate hike

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Published Apr 20, 2017

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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

 

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