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Money markets ecb rate cut bets push back to october

Feb 10 The European Central Bank is not expected to cut interest rates again until October at the earliest, money market prices showed on Friday, as traders exited bets for a move in March after the bank gave no hint of further monetary easing any time soon. ECB President Mario Draghi on Thursday pointed to signs the euro zone economy had stabilised recently while warning of big risks to growth, which analysts took as a signal the bank would keep rates steady at 1 percent for the near term. A Reuters snap survey of 57 economists showed only 14 now think the ECB will cut interest rates by 25 basis points to 0.75 percent next month. By contrast, a regular survey last week showed 41 out of 71 analysts thought the central bank would resume rate cuts before the end of the first quarter. Calculations based on one-week Eonia rates show money markets are pricing in a 12 percent probability the bank will resume lowering its refinancing rate in October."You have rather flattish Eonia curve until October ...(which) shows the market is convinced the ECB will continue to carry out its unconventional measures but will not move on the refi rate or conventional policy," said Matteo Regesta, a strategist at BNP Paribas. Economists at RBC Capital Markets said they were no longer expecting further rate cuts from the ECB, reversing their call before Thursday's ECB meeting for further monetary policy easing in coming months.

The ECB's emphasis on some tentative signs of stabilisation in economic activity was consistent with maintaining an expansionary monetary policy, they said."But the diminishing stresses in financial markets and the banking system will probably do enough to ease monetary and financial conditions to enable the ECB to avoid crossing the 1 percent level," they said in a note.

CASH MANIA Interbank lending rates kept up their downward trend on Friday after Draghi urged banks to make use of the generous long-term liquidity the central bank will offer later this month. The ECB also approved an expansion of the type of collateral it accepts at its liquidity operations, which could see banks snap up three-year funds on offer on Feb. 29 after they took up nearly half a trillion euros of the first loans in December.

With expectations of the uptake for the February round matching or even exceeding December's demand, downward pressure on lending rates in the money market remains intense. Three-month Euribor rates, traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending, fell to 1.063 percent, the lowest level since late January last year. Equivalent London offered interbank rates fixed at 0.99157 percent, its lowest in just over a year and down from 0.99943 percent. Signs of money market stress have also been abating, with the trend set to continue barring Greece tipping into a chaotic default after its efforts to secure a second bailout hit another glitch on Thursday. The spread of three-month euro Libor over OIS or anticipated central bank rates, tightened two basis points to 64 bps on Friday, down from over 90 bps hit in early December."As long as the mania about the ECB liquidity continues and with an accident in Greece being averted for now, there is no point in taking the other side and we expect spreads to come in further, both in spot and forward terms," Commerzbank strategist Christoph Rieger said.

Money markets short rates stay low, 4 week t bills sold

* U.S. 4-week bills sold in recent tight range* Prospective ECB rate cut pushes Euribor lower* Interbank lending rates ease* Overnight collateral rates holding in upper teensBy Ellen FreilichNEW YORK, Aug 7 The Federal Reserve's near-zero interest-rate policy kept U.S. bill rates low on Tuesday, providing the backdrop for a typical weekly four-week Treasury bill sale. The Treasury sold $40 billion in four-week bills at a high rate of 0.085 percent, awarding 23.55 percent of the bids at the high. The value of bids received outflanked those accepted by a 4.23 ratio.

"This was just another business-as-usual four-week bill auction," said Thomas Simons, vice president and money market economist at Jefferies & Co. "The auction fit the same profile we've seen a lot in these auctions over the last few months where the statistics seem to come in a really narrow range."Elsewhere in the short-term paper market, overnight general collateral repo rates, closing at 10 basis on Monday, opened higher on Tuesday, but were expected to soften again by the end of the day, said Roseanne Briggen, market analyst at IFR, a unit of Thomson Reuters. Two-year and three-year notes traded above general collateral rates while five-year and seven-year notes were a bit lower, she said. "The 10-year and bonds remain special, a function of repo plays" before Treasury's refunding sales of 10-year and 30-year bonds on Wednesday and Thursday, respectively, she said. Overseas, bank-to-bank lending rates inched down and were expected to grind lower after the European Central Bank last week fueled expectations of further interest rate cuts and more non-conventional policy measures.

ECB President Mario Draghi said the bank's policymakers discussed cutting interest rates at their meeting last Thursday but decided the time was not right. Draghi's comments increased expectations the bank could cut its main refinancing rate from its current record low of 0.75 percent, but also tempered expectations of the ECB starting to charge banks for depositing funds with it overnight. Three-month Euribor rates, traditionally the main gauge of unsecured bank-to-bank lending, eased on Tuesday to 0.370 percent from 0.374 percent.

However, investors' immediate focus after last week's meeting was the prospect of the ECB resuming purchases of Spanish and Italian government bonds, if the countries activated the euro zone's rescue funds, to lower borrowing costs. Since Draghi said on July 26 he would do whatever was necessary to preserve the euro, Italian one-year bill yields have halved to 2.38 percent while their Spanish equivalents have dropped some 150 basis points to 3.17 percent. Draghi pared expectations of a further cut in the deposit rate paid to banks on cash parked at the ECB overnight. The deposit rate has recently tracked 75 basis points below the refinancing rate so another cut would push it into negative territory. The overnight Eonia rate is still seen falling from its current 11 basis points to around 3 basis points by the end of the year, according to forward prices. The ECB hopes the unprecedented move in the deposit rate to zero will boost interbank lending by forcing banks to look for more profitable options, but so far, institutions are mainly leaving the money in their current accounts at the ECB.