Money markets draghi threats fail to drag down market rates

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Money markets shrugged off the European Central Bank's latest efforts on Thursday to halt the rise in bank-to-bank borrowing costs, despite sharpened rhetoric and another threat to cut interest rates if needed. Money market rates - the starting point for how much banks charge consumers and firms for loans - have been edging up over recent months as the impact of the rise in global bond yields has been complemented by a steady return of ECB crisis loans. The move is effectively an uncontrolled tightening of euro zone monetary policy and ECB President Mario Draghi came out battling to halt the recent upward trend, after the bank held its main interest rate at 0.5 percent again."We will remain particularly attentive to the implications that these developments may have for the stance of monetary policy," Draghi said."If interest rates developed or money market developments were unwarranted in view of our assessment of medium-term price stability... we stand ready to act."He went on to repeat the threat the ECB could cut rates if things continued but markets appeared unconvinced, with both shorter and medium term rates bouncing back to where they started the news conference after an early dip.

But spot Eonia rates from 1-week to 1-year and euribor futures were all roughly were they were before Draghi spoke once the dust had settled. One-year one-year Eonia rates, which reflect where one-year Eonia contracts are expected to be in one year's time, were last at 0.56 percent, over 20 basis points higher than where they were in July when the ECB introduced its forward guidance plans."Eonia (1-year) sold off a bit when he mentioned lower rates but then it bounced back. If he had said that a couple of months ago it would have rocketed the other way," said one London-based money market trader.

"I think a lot of people have come back from holiday and are dying to doing something and put some risk on so, I do think it will continue unless we get some bad data or maybe what's going on in Syria changes things."STEEP ENOUGH?

With the euro zone economy finally showing signs of improvement, Draghi's options to counter the market move in rates are limited to verbal warnings, analysts say. But some experts also point out that with excess liquidity in the euro zone's banking system at around 240 billion euros , still well above where it normally would start to impact rates, there could be a period of consolidation ahead. Draghi himself stressed on Thursday that in the current climate the sensitive level for excess liquidity may be closer to 100 billion euros than the 200 billion some have used as a reference in the past."The uptick in the longer end of the curve are levels that are still acceptable but I would rather be a seller than a buyer at the moment," said a second, euro zone-based trader."Maybe if excess liquidity got to around 100 billion the short dates would move a little but at the moment I don't expect the curve to steepen much, it is priced in enough."