Markets have wound back their expectations for European Central Bank interest rate hikes this year, but despite increasing jitters over Greece they may now be pricing too dovish a scenario, rate strategists say. After the ECB did not signal a rate hike in June, and with speculation over a Greek debt restructuring mounting, overnight indexed swap rates based on December's ECB policy meeting date show the market only fully pricing in one further rate hike this year, compared with two previously.
ECB Executive Board member Juergen Stark said on Wednesday that markets may not have "fully understood" what the central bank communicated at its policy meeting last week. He also noted that Greece, Portugal and Ireland only accounted for 5 percent of overall eurozone GDP and that concentration should be focused on the other 95 percent. Morgan Stanley strategists expect the ECB to use its staff inflation projections to be released in June to pave the way to signal the next rate hike in July, and the refinancing rate to eventually reach 2 percent. The other key point of interest at June's policy meeting will be what the ECB decides to do about its unlimited liquidity provision with the last such three-month tender scheduled for the end of that month. Benchmark three-month Euribor rates were a third of a basis point lower at 1.37313 percent, with equivalent dollar rates little changed at 0.26075 percent.
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