Interbank Euribor rates have fallen below their dollar counterparts as money markets expect the European Central Bank to play catch up with the near-zero rate policy of the U.S. Federal Reserve.
Money markets are increasingly pricing in the possibility that the ECB will cut refi rates again in the second half of this year and/or reduce the deposit facility rate which would take it to negative territory.
While only seven in a Reuters poll expect the central bank will cut the refi rate by 25 basis points for a second month in a row in August, the survey showed a clear majority - 44 out of 69 - expect it will do so before 2013.
An interest and deposit rate cut earlier in July, along with expectations of more to come, drove three-year Euribor rates to new record lows this week and below U.S. interbank lending rates last for the first time since 2008 recently.
But analysts said the move was more a reflection of rate expectations than any indication that the escalation in the euro zone debt market was seeping through into money markets.
"In January 2008, it was tensions in the U.S. dollar market that pushed three-month Libor up. This explains why in that period, the dollar Libor was much higher than Euribor," Giuseppe Maraffino, strategist at Barclays said.
"Now the fact Euribor is lower than dollar Libor reflects different monetary policy expectation between Europe and the U.S. (rather than rising tensions in Europe)."
Three-month Euribor rates, traditionally the main gauge of unsecured bank-to-bank lending, hit a new all-time low of 0.427 percent from 0.435 percent. That was below the U.S. dollar Libor rate which last stood at 0.448 percent.
Maraffino said the market was pricing in some chance of a rate cut in the fourth quarter of the year, while in the United States the debate is now more about whether or not the Fed would do another round of quantitative easing.
Fed Chairman Ben Bernanke last week offered a gloomy view of the economy's prospects, but provided few concrete clues on whether the U.S. central bank was moving closer to a fresh round of monetary stimulus.
"U.S. rates are already close to zero, so the Fed is not expected to cut the Fed fund rates further, whereas in the euro zone, markets are pricing in further monetary policy action by the ECB via a policy rate cut," Maraffino added.
The spread between three-month Euribor rates and three-month dollar Libor rates fell below zero for the first time since 2008 on Friday and was last at -2 basis points.
Given market expectations for lower interest rates in the euro zone, analysts expected that gap to fall further, as far as -10 to - 15 bps.
"You could argue that the ECB has not been as accommodative as the Fed until now. So if it's a catch-up game, then the gap can be closed but it's going to be closed on the ECB's leg, not on the Fed's leg," Matteo Regesta, strategist at BNP Paribas said.
Both the ECB and the Fed will hold monetary policy meetings next week. Markets are hoping for at least some signal of further action as Spanish borrowing costs rose sharply this week in the latest escalation of the euro zone debt crisis.
Two rounds of cheap ECB financing has insulated money markets somewhat from volatile debt markets by ensuring banks are awash with cash. But the liquidity has done little to solve their underlying problems and to inspire banks to lend.
In a sign of that reluctance, the ECB said 11 percent of banks that took part in its latest quarterly Bank Lending Survey made it harder for companies to borrow in the second quarter, while only 1 percent eased their rules.
Separate data showed the ECB saw a jump in demand for its dollar funding as a deepening crisis left an increasing number of banks reliant on central bank support.
"It tells you that with the escalation of the euro crisis to yet higher levels, pressure for dollar funding is increasing. European institutions are recently finding it more difficult to fund in non-euro denominated assets," Regesta said. "That's clearly a result of risk aversion."
0 comments:
Post a Comment