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Money markets pricing in higher chance of ecb deposit rate cut

* 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

Money markets rates to stay low after ecb dismisses exit talk

* ECB to allow measures to have effect* Spanish pressure spreading to corporate creditBy Kirsten DonovanLONDON, April 4 Euro zone money market rates are set to stay at rock bottom levels after ECB President Mario Draghi said on Wednesday it was premature to talk of an exit from the bank's unconventional monetary easing policies. The European Central Bank held interest rates at a record low 1 percent, waiting for support measures take full effect and support an increasingly shaky recovery. . Several policymakers, led by the German Bundesbank chief Jens Weidmann, have said in recent weeks that the ECB needs to prepare an exit strategy after pumping about 1 trillion euros of cheap three-year funds into the financial system since December. But the euro zone debt crisis is showing signs of flaring up again with Spain in the firing line on concerns over the country's ability to meet budget targets. Spanish borrowing costs jumped at a bond auction on Wednesday and the country only sold 2.6 billion euros of debt, the lower end of the target range.

"Keeping in mind what is going on in the periphery with Spain increasingly in trouble and the effect this could have on banks and the like, for the time being the bias is rather towards a further easing of policy - be that standard or non-standard - rather than exit policies," said DZ Bank rate strategist Michael Leister. Euribor futures <0#FEI:>, which reflect interest rate expectations are more or less flat throughout 2012, reflecting no near-term expectations for a change in monetary policy. But with upbeat macro-economic data out of the U.S. and receding expectations for more monetary easing in the world's largest economy, the comments from Weidmann and others led to a steepening of the money market curve as markets priced in higher rates in 2013 and 2014. That has already been partially reversed and may reverse further.

"I don't think that (Draghi) should really start to discuss the exit strategy after he's only just put the thing in place," said David Keeble, global head of rates at Credit Agricole."It's certainly a discussion for six months rather than for today."Draghi said it would take time to see the full impact of the ECB's longer-term operations, but that banks still needed to take steps to strengthen their resilience further. Separately, a top official at Italy's central bank said the country's banks had not used the more than 250 billion euros they took from the ECB's three-year financing operations to increase lending to companies and the real economy.

Rather, the banks had so far used the money to plug their funding needs. There were also signs that the turn in sentiment towards Spain was feeding through to corporate bond markets where spreads were widening."Daylight now between Spain and Italy. We've seen consistently better sellers of Spanish paper for the best part of a week now and the poor auction today will not help," said Societe Generale credit strategist Suki Mann."The storm clouds have been gathering over the sovereign... Sentiment is worsening over Spain's ability to handle the austerity/growth dynamic... Funding is closed."In contrast to the euro zone, short-term U.S. interest rates futures fell on Tuesday after minutes from the Federal Reserve's last policy meeting suggested policymakers are not ready to embark on more bond purchases to keep rates lower in a bid to stimulate the economy. The December 2014 Eurodollar contract fell 11 ticks on Tuesday, pushing implied rates higher although it gave back some of that on Wednesday to stand at 98.655. However, interest rate futures imply traders are not fully pricing in a Fed rate increase until early 2014.