After remarks from ECB chief Mario Draghi in Sintra, Portugal,
in late June were seen as signaling a policy change, money
markets quickly shifted to reflect expectations for a rate rise
as early as mid-2018.
But those bets have been scaled back as recent comments by ECB
officials and inflation, well below the ECB's near 2 percent
target, prompt investors to reassess their most aggressive
Forward Eonia bank-to-bank rates, a closely followed gauge of
the market's rate expectations, dated for the ECB meeting next
June stand at minus 0.35 percent, just a basis point above the
Eonia spot rate of minus 0.36 percent. <ECBWATCH>
That gap implies markets attribute just a 10 percent probability
to a 10 basis point hike by next June - a move that was fully
priced in back in early July.
"Post Sintra, we've had some dovish talk from the ECB with the
taper announcement not expected until the autumn," said Martin
van Vliet, a senior rates strategist at ING, referring to when
the central bank may signal when it will begin scaling back its
"Draghi didn't say anything at Jackson Hole either and we have
the euro at $1.20. Because of this I think most people have
given up on the idea of a rate hike as soon as next year."
Draghi, in a highly anticipated speech at a central bank
gathering in Jackson Hole, Wyoming, last week, did not give the
markets any new clues on monetary policy.
A rally in the euro to above $1.20 <EUR=> meanwhile has cemented
expectations the ECB will strike a cautious tone when it meets
The single currency has gained more than 14 percent this year,
dampening the price of imported goods and helping to keep
inflation subdued. Inflation in the bloc is 1.3 percent.
Against this backdrop, market expectations for a rate rise later
next year have also been scaled back.
Eonia futures suggest roughly a 30 percent chance of an increase
in the ECB's minus 0.40 percent deposit rate by next September
and around a 60 percent chance of a move by the end of 2018.
This is also down sharply from early July when market pricing
showed investors anticipated a hike by mid-June next year and a
high chance of a second move by the end of 2018.
"I don't see the ECB hiking rates in the next couple of years --
excepting an inflation surprise which isn't being priced in by
markets," Rory McPherson, head of investment strategy at Psigma
Investment Management, told Reuters' Global Markets Forum.
(Reporting by Dhara Ranasinghe, Graphic by Ritvik Carvalho,
Editing by Hugh Lawson)
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