Money markets traders positioned for ecb refi rate cut

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* Market anticipates ECB rate falling 25 bps to 50 bps* Deposit facility rate expected to remain at zero percent* ECB delay to provoke only limited re-pricing in EuriborBy William JamesLONDON, Sept 3 Money market pricing shows the European Central Bank is expected to cut its refinancing rate to a record low of 50 basis points from 75 basis points on Thursday, but leave its deposit rate unchanged at zero. The ECB is seen in monetary easing mode as it bids to prevent the bloc's economy shrinking further, while it is also expected to unveil details of a new bond buying plan to lower the borrowing costs of the region's embattled sovereignsUnder the auspices of these aims, the refinancing rate at which the ECB lends money to banks is seen falling to a record low 50 basis points, but no further cuts are expected to the deposit rate, which was reduced to zero in July."It's clear that the market is expecting something (for the refinancing rate), but when it comes to the deposit facility rate the market does not believe that the ECB will cut into negative territory," said Patrick Jacq, strategist at BNP Paribas in Paris.

Anything outside this scenario would see markets scrambling to reprice the short-dated rates at which money changes hands between banks but, given the current ultra-low interest rate environment, the magnitude of those moves would be limited. Traditional signals on market expectations of the ECB's main refinancing rate have been obscured by a huge excess of loans by the ECB to the banking sector, but pricing discrepancies show a cut is widely anticipated, analysts said. For example, the current three-month Euribor rate, which is correlated to the ECB rate, last fixed at 27.6 bps, but a futures contract linked to Euribor and expiring on Sept. 17 shows traders expect the daily fixing to fall to 24.5 bps. Similarly, a jump lower over the coming days can be seen in the forward Eonia overnight rate linked to the ECB's Sept. 6 meeting, which is priced at 8.4 bps, 2.5 bps below the current market rate of 11 bps.

However, the ECB's deposit rate -- which determines how much interest the central bank pays on money placed overnight at the central bank -- is not seen making an unprecedented fall into negative territory. Using the rates implied by forward prices and assuming a constant relationship between current market rates and the ECB's benchmark rates, Deutsche Bank sees a 67 percent probability that the refi rate is cut and the deposit rate remains at zero. Their analysis suggests the implied Eonia rate is too high to be consistent with a deposit rate cut and that Eonia would need to be below zero to if both the deposit rate and refinancing rate were expected to be cut.

SCALE OF REPRICING Despite the relative confidence of market participants, economists were less sure of the ECB's actions. A Reuters poll conducted last week showed 36 out of 70 were expecting a refinancing rate cut. If the ECB did disappoint the market on the refi rate cut, Eonia rates would rise by 5 to 6 basis points said BNP Paribas's Patrick Jacq. But, the reaction in longer-dated rates products like Euribor would be limited because keeping rates on hold would only be seen as a temporary delay."As the Euribor strip is already pricing the refi rate at 50 basis points in the medium term, the impact on the futures contracts -- except the September 2012 one -- should be marginal," said Barclays Capital strategist Giuseppe Maraffino in a note to clients. In keeping with this view, the Reuters poll showed a strong consensus for a rate cut by the end of the year, with October the most likely if the ECB does not deliver in September. (Editing by Chris Pizzey, London MPG Desk, +44

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