Bets for at least two more European Central Bank interest rate hikes this year held their own on Friday and only major shocks from economic growth data next week could shake them in the near term. December Euribor futures were last 2 basis points down to 97.97, shrugging off the pricing out of a June increase after the ECB's meeting on Thursday and a rout in commodity prices, which could point to lower inflation in the future.
Historically, Euribor has traded around 10-15 basis points above the key refi rate, meaning the market is fully pricing in 50 bps worth of hikes this year with chances for a third quarter-percentage-point rise. This was little changed from before Thursday's ECB meeting, when many investors who expected the statement to include the words "strong vigilance" - which is usually code for a rate hike in the following month - were caught short. Analysts say the ECB managed to firmly anchor overall rate expectations by constantly expressing concerns about above-target inflation and clearly differentiating between its interest rates and liquidity policies.
After ECB President Jean-Claude Trichet made clear that renewed tensions in the euro zone periphery sparked by talk about a potential Greek debt restructuring had not had an impact on its monetary policy assessment, economists say only a major shock to the economic recovery could hit end-year expectations. That is in stark contrast with the UK curve, where uncertainty over economic growth has pushed expectations for a first rate hike to December or January, whereas two weeks ago markets saw a better-than-evens chance for a hike this month.
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