EUR Money Markets - Re-anchoring risk? - Rabobank

"We believe that the ECB will emphasise that rates will remain low for a long time – potentially adding that they won’t move rates until inflation becomes more durable and in line with the ECB’s mandate," argue Rabobank analysts.

Key quotes:

"The steepening in the Eonia forward curve, as illustrated by figure 12, is perhaps a bit misleading. Post-ECB, money market rates flattened. This flattening was, in our view, the result of Draghi's reassurance that ‘sequencing’ was not discussed, sending a signal to markets that they should not expect interest rates to rise before the net asset purchases have been reduced to zero."

"The rise in Eonia forwards, resulting in a steeper curve compared to just prior to the ECB meeting, rather is a thing from last week or so onwards. We believe that this is not necessarily Eurozone-driven, but rather could be a spill-over effect from speculation with regard to Fed and BoE policy. Especially for the latter we have witnessed a shift in the direction of a rate hike in the near future. We, therefore, believe that this recent steepening may not fully be in line with the ECB’s intentions."

"As Draghi noted, end-October we should expect a pretty broad and detailed recalibration of the ECB’s monetary policy framework. As we’ve argued for some time now, the current guidance ties the fate of the asset purchase programme too much to the inflation outlook, disallowing the ECB to taper purchases without a change in the guidance. Instead, we expect the ECB to broaden the scope of the guidance, whilst possibly putting some more emphasis on the path of interest rates. Such a rework of the guidance is also necessary if the ECB wants to avoid further tightening of financial conditions, in light of the recent appreciation in the euro and rise in money market rates."

"In other words, we believe that the ECB will emphasise that rates will remain low for a long time – potentially adding that they won’t move rates until inflation becomes more durable and in line with the ECB’s mandate. Given the recent reversal in money market rates, such an announcement may cause some re-flattening as the ECB re-anchors expectations to a ‘low rates for longer’ view."