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ECB Will Still Cut Rates to Boost Economy, Money Markets Signal

The European Central Bank will still cut interest rates in months to come to kick start the continent’s flagging economy, a money-markets gauge signaled after policy makers left borrowing costs unchanged.

The euro interbank offered rate for three-month loans fell to a record 48 basis points below the ECB’s main refinancing rate today, pointing to a possible reduction. The Frankfurt-based central bank kept its benchmark at an all-time low of 0.75 percent after economists were split on whether today’s monthly meeting would result in a cut.

Euribor, the rate banks say they charge each other for loans, has tumbled to the lowest ever because of previous central bank cuts and expectations ECB President Mario Draghi would announce a program of bond buying to cap sovereign borrowing costs.

“Euribor is certainly moving to price in a good chance of a cut in the refinancing rate,” said Chris Clark, an interest-rate strategist at ICAP Plc, the world’s largest interdealer broker. “Euribor has also been falling partly due to an easing credit outlook for the banking sector, brought about by the prospect of a robust ECB bond-buying program.”

Stymied Economy

The economy of the 17-member euro area is still shrinking after Draghi’s pledge in late July to do whatever’s necessary to contain the crisis sent government bond yields tumbling. Gross domestic product fell 0.2 percent in the second quarter, the European Union’s statistics office said today, confirming an initial estimate published on Aug. 14.

Three-month Euribor has declined to 0.266 percent, from 1.534 percent a year ago, according to data compiled by Bloomberg. The benchmark, derived from a daily survey of lenders for the European Banking Federation, will continue to slide to 0.22 percent, according to the implied rate on the futures contract expiring in December.

Other money-market measures also showed greater confidence, with a gauge of European banks’ reluctance to lend to one another at the lowest in more than a year.

The difference between Euribor and overnight indexed swaps, or the Euribor-OIS spread, narrowed to 18.1 basis points at 12:55 p.m. in London. That’s the lowest since June 14, 2011, and down from 19.4 basis points yesterday.

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