Markets see ECB rates on hold through first half of yr
Sabre-rattling by European Central Bank officials has persuaded financial markets that the ECB is not about to cut interest rates, despite signs of easing inflationary pressures and economic slowdown in the euro zone.
RBS profits up 9 percentAlthough oil prices and near-term inflation expectations slid this week, euro zone inflation is still almost double the ECB's 2 percent target. The Governing Council is therefore expected to keep benchmark borrowing costs at 4.25 percent on Thursday and for at least the rest of this year.
Figures derived from Euro Overnight Index Average (EONIA) rates show financial markets expecting no rate cuts this year and just 25 basis points of easing by the third quarter of 2009, according to Bank of America.
That is a marked change of sentiment from the 60 or so basis points of cuts which were in priced a week ago when, despite signs of slowing euro zone growth, ECB policymakers doused speculation that lower interest rates were on the way.
Vice President Lucas Papademos went so far as to say that further rate rises could be needed if high inflation sparked a wage-price spiral.
On Thursday President Jean-Claude Trichet is also likely to discourage any thoughts of lower rates.
"This probably all points to a relatively hawkish press conference this week, or at least one where Mr Trichet will attempt to dispel the market's expectation for rate cuts this year," said Societe Generale economist James Nixon.
U.S. crude oil CLc1 has fallen almost $40 a barrel from July's peak to around $108. That has helped to push the spot break-even rate - a measure of near-term inflation expectations - for French inflation-linked bonds down as low as 2.0 percent this week.
This is the lowest in a over a year and sharply down from 2.70 percent two months ago.
But analysts highlight the stability of forward break-even rates, which take a longer term view of inflation expectations.
|
|
