March 10, 2017 / 9:06 AM / 4 months ago

Investors bet on euro zone rate hike in early 2018

European Central Bank (ECB) headquarters in Frankfurt, Germany, July 29, 2016.Ralph Orlowski/File Photo

LONDON (Reuters) - Investors expect the European Central Bank to raise interest rates by March 2018, money market prices show, with some banks forecasting multiple hikes in 2018 on expectations the central bank will wind down stimulus as the European economy improves.

Forward Eonia bank-to-bank rates dated for the ECB meeting on March 8 next year stood at around minus 0.25 percent, some 10 basis points above the Eonia spot rate of minus 0.35 percent. ECBWATCH

Analysts say this gap suggests markets are pricing in a 10 basis point hike in the ECB's deposit rate by next March, shortly after the scheduled end of the ECB's current bond-buying scheme. The ECB's deposit rate is currently minus 0.40 percent.

The change comes after ECB President Mario Draghi pledged on Thursday to keep an aggressive stimulus policy in place at least until the end of the year but signalled a diminishing urgency for more policy action.

This pushed bond yields and the euro higher as markets begin to price in a normalisation of monetary policy, albeit only several months in the future.

"The very fact that Draghi said it out loud, that the ECB discussed making changes to forward guidance has added to expectations of rate hikes in the future," said RBC strategist Vatsala Dutta, though she said that tightening of policy was still far away.

Barclays analysts, for example, expect rate hikes to begin in 2018. They said in a note that the deposit rate would climb to minus 20 basis points next year, possibly delivered in two 10 bps increases in the second and fourth quarter of 2018.

Money market rates also suggest there is around an 80 percent chance of a 10-basis point hike by the meeting on Jan. 25, 2018 and a 60 percent chance by December 2017.

Reporting by John Geddie; Editing by Jamie McGeever

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