Uncertainty over the economic impact of the Japanese crisis has led eurozone money markets to factor in two rather than three ECB rate hikes by year end, though a third hike may be priced in again unless the problems escalate. Expectations for three hikes, fully priced last week, dropped faster than those for an increase in April, though analysts say fundamentally nothing has changed yet and this is only a sign of market uncertainty.
The rate implied by overnight index swaps at the end of the year dropped by 15 basis points from the last ECB meeting to 1.65 percent. The OIS rate implied for April dropped by only 3 bps to 0.95 percent, showing a 25 basis point hike virtually priced in against the two-week Eonia rate, which stood at 0.715 percent and which serves as a proxy for ECB base rates.
Analysts say this trend is likely to reverse quickly unless signs appear that Japan's nuclear crisis, triggered by its biggest earthquake on record, creates enough damage to have a lasting impact on global growth. Euribor futures contract for April show the market expects the euro zone's benchmark rate to be trading at 1.285 percent in a month's time. Traditionally and in normal functioning money markets, Euribor trades around 10-15 basis points above the ECB's key rate.
Yen interbank rates were unchanged after Japan and other major central banks intervened to tame the yen's surge on Friday, with analysts saying cash conditions were already very lax. London interbank offered rates for three-month yen were fixed at 0.20000 percent for a fourth consecutive day. Equivalent euro Libor was up slightly at 1.12250 percent versus 1.12125 percent on Thursday.
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