Reuters: US Dollar Report: MONEY MARKETS-Projected 2015/16 euro cash rates hit record low

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MONEY MARKETS-Projected 2015/16 euro cash rates hit record low Apr 23rd 2013, 12:45 Tue Apr 23, 2013 8:45am EDT * Markets expect ECB to keep rates low for longer * 2015-2016 Euribor futures rally to record highs * Liquidity levels expected to remain elevated By Marius Zaharia LONDON, April 23 (Reuters) - Projections of key euro zone bank-to-bank Euribor lending rates for 2015 and 2016 hit record lows on Tuesday, after a downbeat German business survey increased bets that the European Central Bank may cut rates and keep them low for a long time. The survey showed Germany's private sector shrank for the first time in five months in April, suggesting Europe's largest economy may contract again this year and strengthening the case for more European Central Bank rate cuts. Comments from ECB policymakers on Monday stressing falling inflation and poor growth prospects were also taken as a hint that the central bank might cut its key refinancing rate by 25 basis points to a new record low of 0.5 percent in May or June. The ECB left rates on hold at its April policy meeting, but ECB President Mario Draghi said the bank would monitor very closely all data and stand ready to act to boost the recession-hit euro zone. The June 2015 Euribor future hit a record high of 99.58, indicating that the market expects the benchmark three-month Euribor rate to settle at 0.42 percent in June 2015 - the lowest ever projection for that time period. Longer-term Euribor futures across the 2016 and 2017 strips also hit record highs, although volumes thinned out towards the long end of the curve. The Dec. 2016 contract rose by as much as 5.5 ticks to 99.12, indicating interest rates of 0.88 percent. "Negative news on the macro side drives a flattening of the curve," ING rate strategist Alessandro Giansanti said, adding that longer-term Euribor contracts could continue to rally. The projected rates for 2015 and 2016 were higher than Tuesday's settlement of 0.207 percent for three-month Euribor rates. But this was perhaps not high enough to price in a complete repayment of the three-year crisis loans (LTROs) banks took from the ECB in late 2011 and early 2012, analysts said. They said money market rates pointed to expectations that the ECB would offer more unlimited loans to the weakest banks in the euro zone, keeping the excess liquidity in the banking sector at levels high enough to keep money market rates subdued. "It's difficult to see how the peripheral banks will come off ECB support," said Anders Svendsen, chief analyst at Nordea. "The market takes the view that once the LTROs have expired these banks will still have to be supported by the ECB and there will be sufficient liquidity in the system." ING's Giansanti said the low level of long-term rates suggested markets saw a chance that the ECB might come up with new unconventional monetary policy easing measures along the way. "These could be another round of LTROs for peripheral banks, maybe starting quantitative easing (printing new money via asset purchases) ... or moving the deposit facility rate into negative territory to encourage banks to lend," he said, adding that none of these were fully priced in. Link this Share this Digg this Email Reprints

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