Money markets ecb rate cut still expected this year

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Money markets are still pricing in another ECB interest rate cut this year even though expectations have been scaled back slightly after the bank's chief provided few clues on future monetary policy. The European Central Bank's meeting was dominated by the launch of a new and potentially unlimited bond-buying programme to bring down the borrowing costs of struggling euro zone sovereigns, with official interest rates taking a back seat. The ECB left the refinancing rate steady at 0.75 percent and Mario Draghi said the Governing Council had discussed rates but "the decision was that it was not the right time" to move them. While the euro zone economy would probably contract more than previously expected this year, according to new staff forecasts, the central bank also raised its inflation outlook for 2012/2013, giving markets no clear steer on future rate policy intentions."The Euribor strip has fallen in terms of price which is the market paring back expectations of an additional rate cut," Richard McGuire, rate strategist at Rabobank said."Growth is looking more sluggish but inflation is looking a bit stickier, I think that is potentially informing some of that paring back of interest rate cut expectations."Economists had been split on whether the ECB would cut rates going into the meeting, according to a Reuters poll.

Euribor futures between September and December 2012 contracts were down between 1 to 2.5 basis points compared with a 1 to 1.5 basis point fall before the meeting. Further out on the curve between June and December 2016 contracts, Euribor futures were down between 10.5 and 12 basis points, compared to a fall of 6-9 bps before."On the Euribor side, which is more affected by refinancing rate cuts, I think the market is also undecided. That's why if we look at expiries into 2013 they only moved by 1 to 2 basis points," Max Leung, rate strategist, at Bank of America Merrill Lynch said. He said the long end of the Euribor curve had sold off by more but "that's probably because we have long-ends, like the German 10-year, selling off as well, so it is a general curve steepening."

Ten-year German government bond yields were last up 10 basis points at 1.52 percent and 30-year yields were 12 bps firmer at 2.36 percent. UNCONVENTIONAL MEASURES

Attesting to the growing scope of the ECB's role in trying to resolve the crisis, the focus of the ECB monetary policy meeting was on the details of the bond-buying plan the central bank would conduct to bring down the borrowing costs of struggling sovereigns. The scheme would focus on bonds maturing within three years and was strictly within the ECB's mandate, Draghi said. The plan, which remains conditional on sovereigns seeking formal help, fueled a rally in Spanish sovereign bonds and a sell-off in German Bunds."The fact that the ECB has been quite aggressive on the non-standard policy front, and in so much as it hopes that will draw a line under the crisis, that it also reduces the imperative to provide stimulus through conventional channels i.e interest rates," McGuire added. There was no mention of the deposit rate, which was taken to zero at the last policy meeting, during Draghi's press conference. Overnight Eonia rates are currently around 0.10 percent and some analysts say the fact that Eonia forwards show them falling as far as 0.07-0.02 percent in January is evidence that the market is still pricing in some chance of their being cut into negative territory."The market continues to price in the possibility of another 25 basis point refi rate cut going forward and, to a lesser extent, some possibility of a cut in the deposit rate," a strategist at a bank in London. "But it's also true that this likelihood is lower than it was before the meeting, especially for the expectations on the depo rate."