Fed shock pushes euro money market rates lower, eases ECB job

Thu Sep 19, 2013 7:16am EDT
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By Marius Zaharia

LONDON (Reuters) - Euro zone money market rates fell to six-week lows on Thursday after the Federal Reserve unexpectedly stuck to its $85 billion-a-month stimulus program, easing pressure on the European Central Bank to relax policy.

The Fed's shock decision on Wednesday means global liquidity conditions will stay loose for longer than previously expected, exerting downward pressure on interbank borrowing rates.

The recent peaks in short-term interbank euro rates were a source of discomfort for the ECB and President Mario Draghi warned earlier this month that the levels were "unwarranted" as economic recovery in the euro zone was still "green".

The reduced expectations of the ECB easing policy further limited the fall in money market rates.

"(The Fed decision) underscores that central banks remain dovish ... (but) it surely reduces the risk of another ECB rate cut," said Nordea chief analyst Anders Svendsen in Copenhagen.

The one-year, one-year forward Eonia rate, one of the most traded money market instruments which shows where one-year Eonia rates are seen in one-year's time, fell 8 basis points to 0.36 percent, 20 bps down from September highs.

Euribor futures were up to 22 ticks higher across the 2013-2016 strip, with most contracts hitting 4-6 week highs.

Higher Euribor futures indicate expectations of lower three-month Euribor lending rates, which are a gauge of future European Central Bank policy rates and liquidity conditions.   Continued...

The euro sign landmark is seen outside the headquarters of the European Central Bank (ECB) in Frankfurt September, 2013. REUTERS/Kai Pfaffenbach