Money markets pricing in higher chance of ecb deposit rate cut

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* Draghi says ECB discussed deposit rate cut below zero* July, August Eonia rates turn negative* Deposit rate cut still not base case scenarioBy Marius ZahariaLONDON, Dec 6 A closely-watched money market indicator of European Central Bank interest rate expectations turned negative on Thursday after President Mario Draghi said the bank discussed a cut in the deposit rate. The ECB left its key refinancing rate and the deposit facility rate unchanged at 0.75 percent and 0 percent, respectively, but depicted a bleak outlook for the euro zone economy next year, cutting growth projections. Draghi said a deposit facility rate cut into negative territory was discussed at the meeting, a slight change of tone since he described such a move as "uncharted waters" earlier this year.

Creating negative deposit rates -- effectively charging depositors rather than paying them interest -- is a way of forcing banks to put their money to work elsewhere. Forward Eonia rates, derivative financial contracts used by investors to bet on where the euro interbank overnight rate will trade at certain points in the future, dropped 2-4 basis points across the 2013 strip during Draghi's speech."He was fairly dovish on the outlook for rates, all the forecasts are pretty low, it was a very dovish speech overall," said David Keeble, global head of fixed income strategy at Credit Agricole in New York.

The deposit rate is considered a natural floor for Eonia rates as the risk of parking money overnight at the ECB is perceived to be much lower than at a commercial bank. The Eonia rate forwards dated for the July and August ECB meetings next year briefly turned negative, falling as low as minus one basis point. This compares with a 6.9 basis point settlement of the spot Eonia rate on Wednesday. HARD TO JUDGE

The vast liquidity made available to banks by the ECB and the uncommon sight of negative Eonia rates make it hard to judge what is the precise probability markets attach to the prospect of a deposit facility rate cut. But the small difference between spot and forward Eonia rates makes it "reasonable" to say markets still think a 25 bps cut is less likely than leaving rates flat, Keeble said. Vincent Chaigneau, head of rates strategy at Societe Generale in Paris, said the market priced in a "significant" probability of a deposit rate cut, but added:"If they