Investors no longer fully price in an ECB rate hike in April in light of the shock to growth anticipated after Japan's earthquake, but analysts said only a dramatic escalation of the crisis would push expectations back further. Safe-haven assets rallied and stock markets suffered after the quake and tsunami hit Japan on Friday and triggered a nuclear alert, throwing into doubt the monetary tightening heavily flagged for the European Central Bank's April meeting.
"Right now investors are quite uncertain. On the one hand they know that (ECB President Jean-Claude) Trichet has virtually announced a rate hike for the coming month and on the other they are trying assess how bad the stress in Japan is and whether this could actually affect the ECB's decision," said Unicredit strategist Luca Cazzulani.
Euribor futures contracts for April show the market expects the eurozone's benchmark interbank rate to be trading at 1.280 percent in a month's time. Historically, Euribor has traded around 10-15 basis points above the ECB's refinancing rate, meaning current levels show the market is no longer fully pricing in a first hike for April.
The expected Euribor rate for April peaked at 1.45 percent on March 3 and has fallen by around 5 bps since last Thursday's close. Prior to the news conference at which the ECB signalled a rate hike, the contract implied a Euribor rate of 1.25 percent, meaning it is now trading only slightly above levels seen before the March meeting.
The overnight index swaps curve also illustrated the paring back of expectations, with only two rate hikes now fully priced in by December compared to the three rises anticipated as recently as last week.
However the pace of the repricing has slowed from the previous session, with Euribor futures only slightly higher on the day across the 2011 strip, and analysts believe there is little scope for sharp moves unless the crisis in Japan worsens or the ECB begins to back away from its hawkish stance. Short-dated Asian swap rates also dipped and bond yields fell as market players lowered their expectations of policy tightening.