Euribor futures contracts fell on Wednesday, pricing in higher eurozone interest rates over the long term after a slightly more upbeat economic assessment from the US Federal Reserve caused investors to rethink their rate outlook. The Euribor curve steepened, implying higher European Central Bank rates in the future, with the biggest rise in expectations for the period from December next year.
Analysts said the combination of the Federal Reserve's acknowledgement that the US economy was recovering and the ECB's continued focus on inflation meant markets were increasing bets that central bank rates would rise. At the latest central bank meeting on March 8, ECB President Mario Draghi said inflation rates were likely to stay above 2 percent in 2012, with a persistent risk of a fresh increase. June 2012 Euribor futures fell 1 tick to 99.29 while the December 2013 contract slid 6.5 ticks to 99.025.
This curve steepening move shows the three-month Euribor rate is seen falling to around 70 bps in the near term, weighed down by huge cash surpluses in the banking system, but rising back to around 0.975 percent by the end of next year on the prospect of a rising base interest rate.
"Given the amount of excess liquidity in the system and the fact the economy is not going to pick up significantly near term, we will have a building of those expectations especially in the back end of the curve," said Alessandro Tentori, strategist at BNP Paribas in London. Three-month Euribor rates, which are closely correlated to central bank rate expectations, fell to 0.871 percent on Wednesday.
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