Markets predict future rate cut

Money markets are signalling the European Central Bank will cut borrowing costs within the next three months even as economists forecast policy makers will leave the benchmark rate unchanged today.

The rate that banks say they charge each other for three-month loans has fallen below the ECB's benchmark by the most since 2001, pointing to lower borrowing costs, according to analysts including Alessandro Giansanti at ING Bank in Amsterdam.

The central bank last cut its main rate on July 5th to 0.75 per cent.

"There is high expectation in the market for the refinancing rate to be lowered in the next three months," said Mr Giansanti, who forecasts the rate may be cut to as low as 0.25 per cent by October.

ECB officials meeting today are expected to discuss measures to stimulate the region's economy after President Mario Draghi last week pledged to do everything to preserve the euro.

The euro interbank offered rate, or Euribor, for three- month loans has declined to a record since the ECB cut its refinancing rate by 25 basis points and the deposit rate to zero.

The European Banking Federation's benchmark dropped to 0.375 per cent today, 37.5 basis points below the rate the ECB charges banks for funding, the most since November 2001

"A good portion of the Euribor rate is determined by the refinancing rate, so it serves as a rule of thumb for where the rate will go," said Richard McGuire, senior fixed-income strategist at Rabobank International in London. "Market participants believe that a rate cut is likely, but we'd expect the ECB to sit at the sidelines and see the potential impact of the most recent cuts before acting again."

Euribor was 38 basis points below the refinancing rate on November 7th, 2001 before the ECB cut the rate 50 basis points to 3.25 per cent to boost growth. The cut will allow banks to access central bank funding at a cheaper rate.

Euribor, which is derived from a daily survey of 43 lenders for the EBF, is expected to continue to slide to 28 basis points, according to the implied rate on the Euribor futures contract expiring in September.

Four out of 55 analysts surveyed in a Bloomberg poll forecast the refinancing rate to be cut to 0.5 per cent today with the majority predicting no change.

Bloomberg