LONDON, July 31 - Europe's money markets are betting the European Central Bank will not cut interest rates again in this economic cycle, in contrast with economists, who see at least one more cut to boost growth. The ECB is widely expected to keep rates on hold at two percent when it meets later on Thursday, and a seven-week long sell-off in euro zone rate futures suggests markets are no longer pricing in further reductions. "The consensus among the forecasters is that there will be another move but the screens are not pricing in any move," said one London-based money market dealer. "The ECB has told us not to expect a move over the summer but that is a long time. Look how quickly opinions change, and don't doubt that if the U.S. growth story does come through then the ECB will think it does not need to move rates." All 64 economists polled by last week said the ECB would leave its key rate on hold on Thursday, but the majority predict a further monetary easing in 2003. But the September Euribor rate future, a barometer of market euro zone rate expectations, last stood at 97.935, implying three-month money rates at 2.07 percent. It hit two-month lows of 97.910 on Wednesday and has shed a hefty 25 basis points since hitting contract highs in June -- when markets fully priced in a quarter point rate reduction by September.
EXPECTATIONS TURN
Expectations the global economy has turned a corner, together with ECB comments, have driven a sell-off in money markets and euro zone fixed income markets generally. Guy Qaden, Belgian central bank governor, said on Wednesday that market watchers were unanimous in expecting the ECB to maintain rates, and they were likely to be reassured on Thursday. "The market has fully priced out any rate cut moves this year," said Christoph Rieger, interest rate strategist at Commerzbank in Frankfurt. "The main cause of this is what the ECB has been telling us and judging by its words, the ECB is not keen to cut anytime soon." Rieger added that the EONIA futures strip also suggested that financial markets expect no further monetary easing. Euro overnight index average rates are a weighted average of all overnight unsecured lending transactions in the interbank market and are used by some analysts to provide a clearer view of market rate expectations. Another sign that rate cut bets, which helped drive bond markets higher in the first half year, have been unwound is a sharp rise in interest-rate sensitive short-dated bond yields. Two-year euro debt yields hit three-month highs on Wednesday and last stood at 2.32 percent, above ECB rates. The ECB's rate announcement is due at 1145 GMT. No explanatory news conference is scheduled until after the central bank's following interest rate decision on September 4. The ECB last changed rates in early June, cutting borrowing costs by half a percentage point to two percent, a record low.