LONDON: Investors pushed back their expectations for the next ECB interest rate rise to July from June on Thursday after the bank's president signalled a rate hike next month was unlikely.
While the longer-term view of the rate outlook was little changed, overnight rates linked to July's European Central Bank meeting rose at the expense of those related to June's meeting after bank chief Jean-Claude Trichet said the ECB was monitoring prices very closely.
Crucially Trichet did not use the phrase ‘strong vigilance’, which is interpreted by the market to mean a rate rise will come at the next meeting. ‘Markets thought he was much more dovish than they expected. It's now an issue of which month; whoever expected June is now disappointed and July is now the primary candidate for a move,’ said Lloyds Bank rates strategist Achilleas Georgolopoulos.
Uncertainty over whether Trichet would signal the next rate hike for June or July had seen nervy investors position for a more aggressive cycle of hikes, sending Euribor futures lower in the sessions running up to the policy decision.
However, the slightly more dovish language than some had anticipated prompted a rise in Euribor futures across the strip and Eonia forward rates to fall, both implying lower central bank rate expectations.
Overnight rates linked to the July 7 ECB meeting rose by 8 bps to 1.34 percent, showing markets were pricing in a high probability of a July hike, analysts said.
‘Looking at the rolldown to the previous period's contract we see June at 1.12 and then there's 22 basis point jump to July so we can say that there's a pretty decent chance priced in for a July hike,’ said Benjamin Schroeder, rate strategist at Commerzbank in Frankfurt.
YEAR-END EXPECTATIONS UNCHANGED
The repricing of rate expectations was largely confined to the immediate future, with little from the ECB news conference to suggest a fundamental change in stance over inflation.
Lloyds's Georgolopoulos said the bank's expectation for ECB rates to rise to 1.75 percent by the end of the year was unchanged following Trichet's news conference.
The December Euribor contract rose to 97.98 during the news conference, but remained well within the recent range implying a three-month interbank rate -- which typically sits above the refinancing rate -- of around 2 percent by year end.
Interbank rates continue to press higher with the latest three-month Euribor fixing at 1.424 percent and equivalent euro Libor rising to 1.37938 percent.
Earlier, the Bank of England kept interest rates on hold at 0.5 percent following a run of subdued economic data which has called into question the strength of UK economic recovery.
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