The cost of borrowing dollars, euro and sterling fell further on Friday as concerns over the faltering global economic recovery raised expectations of even looser monetary policy to come. This week, the Federal Reserve downgraded US economic growth prospects while the Bank of England signalled it was in no hurry to raise rates and might even loosen policy further.
Analysts have been busy revising their near-term forecasts for interest rate hikes from major central banks in the wake of the policy statements, as well as rate monitoring tools like Euribor. Among them was Danske Bank on Friday which expects the first US rate hike in the fourth quarter of 2011 and the ECB to hike in late 2011. Both central banks have rates pinned at historic lows of 0-0.25 percent and 1.0 percent respectively.
Danske also forecasts three-month Euribor, an interbank lending rate and gauge of short-term euro zone interest rate expectations, at 0.80 percent in three months' time, before it rebounds to 0.85 percent early in 2011 and stands at 1.0 percent in a year's time.
Earlier, three-month Euribor was fixed at 0.898 percent, nudging down from 0.899 percent on Thursday, while euro Libor fixed lower at 0.83188 percent. "Even though the euro zone debt crisis has faded, the ECB is in no hurry to tighten monetary conditions and we expect the bank to be on hold until late 2011. Growth momentum most likely peaked in Q2 and the economic outlook is still expected to be very uneven, which should keep the ECB somewhat in check," Lars Tranberg Rasmussen, senior analyst at Danske in Copenhagen said.
Christoph Rieger, an interest rate strategist at Commerzbank in Frankfurt, agreed the Fed's decision to reinvest proceeds from maturing mortgage asset-backed securities in US Treasuries was a neutral initiative which fell short of a return to Quantitative Easing. Last week, ECB President Jean-Claude Trichet said growth was expected to slow towards the end of the year. An illustration of the continued worries about stress in the banking sector came from Spanish banks' borrowing from the ECB, also released on Friday. Spanish banks borrowed 139.9 billion euros in July, slightly up from 136.49 billion euros in June.
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