Dealers price in further .25% ECB rate cut

EUROZONE interest rate futures are still pricing in a quarter point cut in European Central Bank (ECB) rates by September, with dealers undeterred by an apparent change of tone from the ECB chief.

In an interview yesterday ECB president Wim Duisenberg said it was too soon to discuss further eurozone rate cuts. This pushed interest rate futures off contract highs set on Tuesday after Mr Duisenberg was reported saying the ECB had not exhausted its ammunition for rate cuts but did not dampen the rate cut talk for too long.

“The ECB is still dovish and it is more a question of the timing and extent of rate cuts and not if rates will be cut,” said Christoph Rieger, interest rate strategist at Commerzbank in Frankfurt.

September Euribor interest rate futures, an indicator of eurozone rate expectations, were up 4.5 basis points at 98.115 but off contract peaks set earlier at 98.155.

“Rate futures shot up yesterday and today went down,” said Ken Wattret, chief eurozone market economist at BNP Paribas. “What Duisenberg said yesterday is that more rate cuts are possible and there does seem to be change in perception at the ECB but today he is trying to stop market expectations from running ahead of themselves.”

The ECB last week lowered its key interest rate an aggressive half percentage point to a record low of 2.0%.

ECB Governing Council member Ernst Welteke said there was no point in speculating now about a further cut in eurozone rates. Analysts and dealers said the comments from ECB officials suggested that while a rate cut may not be delivered in July, monetary easing was still on the agenda.

It was this view that underpinned fixed income markets despite Mr Duisenberg's latest remarks, they added. "What the ECB is saying is not that interest rate cuts are not on their way but to not expect a move in July," a euro debt trader in London said.

The interest rate sensitive two-year Schatz yield remained close to record lows hit earlier around 1.87%.

Short-dated yields trading below benchmark ECB rates are a signal that markets expected further rate reductions.

The latest economic numbers from Germany, Europe's biggest economy, support such a view. German industrial production fell by a sharper than expected 1.0% in April, data released earlier showed.

“The data from Germany shows the economy is at a halt,” said Hypovereinsbank fixed income strategist Alessandro Tentori. “This helps explain why rate cuts are still priced into Euribor futures.” Money markets are pricing in ECB rate cuts through until the end of the year, with the December Euribor future implying three-month money rates around 1.79%.