LONDON, July 25 |
(Reuters) – 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
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.”