Money market indicators showed a growing conviction on Thursday that the ECB would follow through with its signalled interest rate hike in April, but doubts over the pace of further rises look set to persist.
Policymakers have continued to stress that the central bank's intention to tighten policy in response to rising prices remains unchanged by the threat of slower global growth in the wake of Japan's earthquake and conflict in oil-producing regions. Current market levels on the interbank overnight curve showed a 25 basis point rise in the European Central Bank's refinancing rate was fully expected at the bank's April meeting.
Overnight Index Swaps linked to the April 7 meeting have risen to their highest levels since ECB President Trichet took markets by surprise at the March policy meeting by signalling a rate hike was likely next month.
The OIS curve suggests that two rate hikes are fully expected by the end of the year with around a 60 percent probability of a third, assuming ECB liquidity policy is normalised by year-end.
However this current pricing is expected to change depending on what the ECB does in April, creating opportunities to build positions, analysts said. There was also no sign that, as bond markets heaped pressure on Portugal, there was a wider threat of contagion to interbank lending, with much of the turmoil having been anticipated since the turn of the year.
Market participants said there was limited impact on unsecured interbank lending from rating agency Moody's decision to downgrade 30 Spanish banks. Similarly in the repo market, where collateral is sold with an agreement to be repurchased at a later date, funding channels showed little sign of the stress that caused Spanish interbank markets to seize last year.