March 27, 2019 / 3:54 PM / 4 months ago

UPDATE 1-Markets slash ECB rate hike bets, see just 6 bps of tightening in 2020

(Updates with context, comment)

By Dhara Ranasinghe

LONDON, March 27 (Reuters) - Euro zone money markets on Wednesday sharply scaled back expectations for a European Central Bank rate rise in 2020, after latest signals from ECB officials suggested they were in no hurry to tighten monetary policy.

Sources told Reuters the central bank was studying ways to lower the charge that banks pay on some of their excess cash as a possible way to offset the side-effects of its ultra-easy policy on lenders.

Earlier, ECB chief Mario Draghi said the bank could further delay a rate hike and may look at measures to mitigate the side-effects of negative interest rates.

Peter Schaffrik, global macro strategist at RBC Capital Markets, said the money market move reflected the view that the ECB reckons it must now explore ways to ease pressure on banks, given rates could stay low for longer than previously expected.

“Maybe the ECB thought it would be in a position soon to start raising rates and make the problem go away. But if they are not in a position to do so, and interest rates are staying negative for even longer, then they have to do something to help the banks,” he added.

The Euribor futures, a gauge of where markets see rates in the single currency bloc, price in just six basis points worth of tightening by the end of 2020.

Just two weeks ago, almost 20 basis points worth of rate hikes had been priced in for the end of next year, and the sharp turnaround reflects a massive repricing of the rate outlook both in the United States and euro zone in recent days.

Analysts noted a sharp repricing across money market futures with Eonia forwards also now pointing to a slim chance of a rate rise next year.

Those contracts suggest roughly five basis points worth of tightening is now priced into markets by mid-2020.

A scaling back of euro zone rate hike bets comes as investors have started to price in the prospect of U.S. interest rates cuts.

The move also coincided with a slide in the market’s long-term euro zone inflation expectations.

The five-year, five-year breakeven forward - an inflation gauge tracked by the ECB - slumped to a 2-1/2 year low at around 1.33 percent - moving further away from the ECB’s near 2 percent inflation expectations.

Reporting by Dhara Ranasinghe; editing by Sujata Rao and Susan Fenton

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