Markets expect ECB to cut interest rate within months

Money markets are signaling the European Central Bank will cut borrowing costs within the next three months even as the main rate was left unchanged yesterday.

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 Jul 5 to a record low 0.75%.

“There is high expectation in the market for the refinancing rate to be lowered in the next three months,” said Giansanti, who forecasts the rate may be cut to as low as 0.25% by Oct.

ECB officials are expected to act to stimulate the region’s economy after President Mario Draghi last week pledged to do everything to preserve the euro.

The Bank of England held its key rate at a record low 0.5% yesterday after the Federal Reserve pledged on Wednesday to take new policy steps to promote growth.

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% yesterday, 37.5 basis points below the rate the ECB charges banks for funding, the most since Nov 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 Nov 7, 2001, before the ECB cut the rate 50 basis points to 3.25% to boost growth. A 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 29 basis points, according to the implied rate on the Euribor futures contract expiring in Sep.