Eurozone money markets have priced out ECB interest rate hikes between July and the end of the year following a raft of weak data globally and expectations the Greek debt situation will remain precarious. The European Central Bank still looks set to raise interest rates by 25 basis points to 1.5 percent in July after using the code words "strong vigilance" at its June meeting, but that could change if Greece's debt crisis deteriorates sharply next week.
Greece has to pass key austerity measures next week to secure vital financing from the European Union and the International Monetary Fund and avoid a near-term default. Manufacturing surveys out of the EU and jobs and housing data out of the United States meanwhile pointed to fatigue in the global economic recovery, suggesting a low rates' environment for a prolonged period.
The Eonia forward for the July 7 ECB meeting was last at 1.317 percent versus a spot fixing of 0.946 on Thursday. The rate is kept artificially low by abundant cash pumped into the system by the ECB through its liquidity facilities introduced to help banks hit by the Lehman crisis.
But based on their own liquidity assumptions for July, Lloyds and BNP Paribas models show around a 90 percent probability of a rate hike in July and only one hike fully priced in this year. The spread between three-month euro Libor and overnight index swaps - often used as a gauge of funding stress at the start of the Lehman crisis - has risen only 6 basis points this week to 18 bps, compared to over 100 bps in late 2008.
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