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By John Geddie and Abhinav Ramnarayan
LONDON, March 10 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.
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)