Eurozone money market rates are set to stay at rock bottom levels after ECB President Mario Draghi said on Wednesday it was premature to talk of an exit from the bank's unconventional monetary easing policies. The European Central Bank held interest rates at a record low 1 percent, waiting for support measures take full effect and support an increasingly shaky recovery.
Several policymakers, led by the German Bundesbank chief Jens Weidmann, have said in recent weeks that the ECB needs to prepare an exit strategy after pumping about 1 trillion euros of cheap three-year funds into the financial system since December. But the euro zone debt crisis is showing signs of flaring up again with Spain in the firing line on concerns over the country's ability to meet budget targets.
Spanish borrowing costs jumped at a bond auction on Wednesday and the country only sold 2.6 billion euros of debt, the lower end of the target range. "Keeping in mind what is going on in the periphery with Spain increasingly in trouble and the effect this could have on banks and the like, for the time being the bias is rather towards a further easing of policy - be that standard or non-standard - rather than exit policies," said DZ Bank rate strategist Michael Leister.
Euribor futures, which reflect interest rate expectations are more or less flat throughout 2012, reflecting no near-term expectations for a change in monetary policy. That has already been partially reversed and may reverse further. "I don't think that (Draghi) should really start to discuss the exit strategy after he's only just put the thing in place," said David Keeble, global head of rates at Credit Agricole.
"It's certainly a discussion for six months rather than for today." Separately, a top official at Italy's central bank said the country's banks had not used the more than 250 billion euros they took from the ECB's three-year financing operations to increase lending to companies and the real economy.
In contrast to the euro zone, short-term US interest rates futures fell on Tuesday after minutes from the Federal Reserve's last policy meeting suggested policymakers are not ready to embark on more bond purchases to keep rates lower in a bid to stimulate the economy. The December 2014 Eurodollar contract fell 11 ticks on Tuesday, pushing implied rates higher although it gave back some of that on Wednesday to stand at 98.655. However, interest rate futures imply traders are not fully pricing in a Fed rate increase until early 2014.