Money markets euribor rates dip, pace of decline to slow

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* 3-month Euribor rate fall below 0.80 percent* Pace seen slowing as it heads towards 0.63 pct record low* Spread between 12- and 3-mo Euribor rate seen tighteningBy Ana Nicolaci da CostaLONDON, March 27 Bank-to-bank Euribor rates fell below 0.80 percent for the first time since July 2010 and the pace of decline is seen slowing as it heads towards record lows. With the European Central Bank poised to keep refi rates on hold for a while, analysts increasingly see three-month Euribor rates stabilising around 63 bps - record lows hit in March of 2010. It fell to 0.79 percent on Tuesday from 0.80 percent in the previous session. At record lows, Euribor rates would still offer roughly a 30 bps premium over the overnight Eonia rate, which stood at 0.35 percent in the previous session. The Eonia rate in turn provides a pick-up over the ECB's deposit facility rate of 0.25 percent. Markets scaled back expectations of further monetary easing in the euro zone after the ECB warned on inflation at its last monetary policy meeting. But austerity and unemployment in poorer euro zone member states could still drag on the region's overall growth, thereby keeping price pressures at bay.

"Our view is that the ECB will remain on hold until the end of next year," Giuseppe Maraffino, fixed income strategist at Barclays Capital said, explaining his forecast that Euribor rates will hit a trough at around 65 bps."Going forward I expect a slowdown in the pace of decline of the three-month (Euribor rate), so this should reduce the spread versus the 12-month and 3-month rate and the six-month equivalent."The spread between 12-month and three-month Euribor rates should tighten as far as 50 basis points, Maraffino said, from 64 bps currently. The six-month equivalent last stood around 30 bps."It is a positive yield curve and I don't think rates are going up within the next year," said a trader. "I would sell the June 2012 Euribor future and I'd buy the March 2013."

The June 2012 Euribor contract was at 99.37 while the March 2013 stood at 99.27 <0#FEI:>INFLATION-WATCH

ECB Mario Draghi on Monday sought to allay concerns in Germany that the ECB's 1 trillion euro funding operation could fuel inflation, saying an improvement in money markets since the move did not pose a risk to price stability. Data this week is expected to show euro zone inflation reached 2.5 percent in March, according to a Reuters poll. That would be a fall from 2.7 percent the month prior but still above the ECB's target of just below 2 percent. But analysts said money markets did not show much concern with inflation at this juncture, with short-term rates still under pressure by massive excess liquidity in the financial system."Inflation (does) not represent first-order risks for the euro economy," Matteo Regesta, strategist at BNP Paribas, said forecasting 3-month Euribor fixings to fall to at least 0.70 percent, albeit at a slower pace. He expected the ECB to keep rates at 1.0 percent until at least January or February 2013 when banks are first allowed to repay 3-year ECB funding. Since the rate charged on the 3-year LTRO money is an average of the refi rate over the duration of the loan, a rate hike would mean higher cost of funding for banks, Regesta added."Even if the German economy overheats and head inflation moves relatively higher, I think the refi rates will be on hold ... until those early repayment dates."