Eurozone interest rate cut unlikely

THE European Central Bank’s efforts to halt the euro’s gains against the dollar and the Federal Reserve’s preparation for higher borrowing costs have wiped out expectations for a rate cut in Europe, futures trading suggests.

Interest-rate futures contracts show traders and investors anticipate three-month borrowing costs will be higher in March than now.

It costs 2.09% to borrow for three months today, compared with a rate of 2.10% on the contract for March settlement. The ECB has held its main refinancing rate at 2%, the lowest in more than half a century, since June.

“The recent softening of the euro, combined with the Fed action, has clearly killed off any hope that might have been out there that the ECB would cut rates immediately,” said Julian Callow, chief European economist at Barclays Capital in London.

He expects the ECB to keep rates unchanged until next year.

The euro’s surge to a record $1.2898 against the dollar on January 12 had ignited speculation of a rate reduction to help narrow the gap with the Fed’s 1% overnight rate and stem the currency’s advance.

ECB president Jean-Claude Trichet and his 17 colleagues on the Frankfurt-based central bank’s board have preferred to rely on words to stop the euro from rising further. And so far it’s worked. The euro hasn’t risen above $1.28 since Trichet said on January 12 he’s “concerned” about “brutal moves” in currencies.

The Fed’s change of tone in its Wednesday statement, preparing the ground for a rate increase, has also brought forward expectations of higher ECB rates, futures trading shows.

The Fed dropped language it has used since August pledging to hold the overnight rate low for a “considerable period,” saying instead it can “be patient” before raising rates.

The rate on the three-month Euribor futures contract for September settlement rose to 2.35% yesterday, the first time it’s exceeded the money market rate by more than 25 basis points since January 6.