Money markets euro zone lending rates are far below us

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Aug 16 Euro zone interbank lending rates have fallen far below their U.S. equivalent on expectations that the European Central Bank will ease monetary policy further, drawing closer to the Federal Reserve's near-zero rate policy. Three-month Euribor rates have hit record lows on a regular basis since the last monetary policy meeting when ECB chief Mario Draghi said the bank's policymakers discussed the possibility of cutting rates at their August meeting but had decided it was not the time. Given U.S. rates are already near zero, further monetary easing in the world's largest economy should come in the form of non-standard measures - probably more "quantitative easing" through central bank bond-buying - explaining the growing difference between euro and dollar interbank rates, analysts said."The divergence between the two ... is mainly due to different monetary policy expectation between the euro zone and the U.S., with markets still pricing the possibility of further policy rate cuts in the euro zone," Giuseppe Maraffino, fixed income strategist at Barclays said."The market is now pricing a high probability of a refi rate cut in the euro zone and also some chance of a deposit facility (rate) in negative territory."Three month euro Libor rates were little changed on Thursday at 21 basis points, half their dollar equivalent at 43 basis points.

The three-month Euribor rates, traditionally the main gauge of unsecured bank-to-bank lending, eased to 0.339 percent from 0.341 percent on Wednesday. The ECB is expected to cut its refinancing rate by another 25 basis points to 0.5 percent in September, according to a Reuters poll of economists. Eonia forwards suggested the market expected overnight rates to fall further from current levels, to a trough of 0.068-0.018 percent in November from 0.11 percent currently.

Given that the deposit rate - currently at zero - serves as a floor for overnight Eonia rates, analysts said this suggested the market was pricing in some possibility of negative deposit rates. ECONOMIC STRESS

While the euro zone economy contracted 0.2 percent in the second quarter and was seen slipping back into recession, recent U.S. data has suggested economic growth might pick up in the second half of the year. Still, the data still pointed to lacklustre growth in the U.S. economy, fueling the view that more Federal Reserve stimulus may be in the offing, although perhaps not as soon as next month. The expectations for ECB action - be it through lower interest rates or some other non-standard measure - was high after strong comments from its president Mario Draghi that the bank would do what was necessary to preserve the euro. Although pledges for bond-purchases would be subject to countries asking euro zone rescue funds for aid first - and therefore highly political - the ECB could also resort to measures such as providing more cheap funding or easing collateral rules further, analysts said. Poll respondents were split on the likelihood of further long-term refinancing operations like those ECB conducted in December and February, essentially hosing the markets down with over one trillion euros of three-year cash."There is a very strong chance of easing, which instrument they use is still open to question," Ciaran O'Hagan, strategist at Societe Generale.