Money markets on Thursday almost fully priced in another European Central Bank interest rate cut by January after the bank surprised markets by trimming borrowing costs at the first meeting presided by Italy's Mario Draghi. The ECB cut rates by a quarter point to 1.25 percent, acting boldly and unanimously to support the ailing eurozone economy as the Greek government stood on the brink of collapse after it was given an ultimatum on its eurozone membership.
"Given the fact that markets were expecting maybe a more prudent stance given the Italian ties of the new governor, a rate cut was priced in by December but not by November fully, so it's an innovation," Matteo Regesta, rate strategist at BNP Paribas, said.
Euribor futures jumped across the 2011/13 curve, with the December contract rising as far as 98.900, having stood flat at 98.700 before the rate decision was announced. By late trade, that contract had come off its high to stand up 7.5 basis points on the day at 98.775. Analysts said Eonia forwards were pricing in a 75 to 90 percent chance of another rate cut by January and a 33 to 55 percent chance that move would come in December.
A Reuters poll of 51 economists showed a 50-50 chance of another cut before the end of the year. The ECB has been in the tough situation of having to balance fallout out from a spiralling eurozone debt crisis with stubbornly high inflation. Data on Monday showed eurozone inflation held at 3 percent for a second straight month in October, above the bank's target of close to 2 percent.
"Given what we have seen this week, there was just no reason to wait," Simon Smith, chief economist at FxPro said. "Whatever the outcome (in Greece), if there is a referendum, if there isn't a referendum or a change in parliament, basically whatever was agreed last week by the EU is just pretty much dead in the water. I think it was certainly a factor." The spread between three-month euro Libor rates and overnight indexed swap rates - a measure of financial risk - was at 79 basis points, when the Libor was fixed, near its highest since March 2009.