MONEY MARKETS-April ECB hike priced in, Dec outlook less clear

 * Markets anticipate April rate rise, but hike cycle unclear
 * Curve may steepen if ECB follows through with April hike
 * Portugal turmoil, Spanish bank downgrade has muted impact
 By William James
 LONDON, March 24 (Reuters) - Money market indicators showed
a growing conviction on Thursday that the ECB would follow
through with its signalled interest rate hike in April, but
doubts over the pace of further rises look set to persist.
 Policymakers have continued to stress that the central
bank's intention to tighten policy in response to rising prices
remains unchanged by the threat of slower global growth in the
wake of Japan's earthquake and conflict in oil-producing
regions. [ID:nFAT007197]
 Current market levels on the interbank overnight curve
showed a 25 basis point rise in the European Central Bank's
refinancing rate was fully expected at the bank's April meeting.
 Overnight Index Swaps linked to the April 7 meeting
(EUIRP25O1=R: Quote, Profile, Research) have risen to their highest levels since ECB
President Trichet took markets by surprise at the March policy
meeting by signalling a rate hike was likely next month.
 However, the picture of how high rates will be by December
remains less clear and subject to greater risks.
 "The market is still to a certain extent in disbelief
because it's looking at an environment where we think global
growth will slow appreciably in the second half of the year,"
said Societe Generale's chief European economist James Nixon.
 "The market's concern is that in that environment... is the
ECB really going to be in a position to say risks to inflation
are on the upside?"
 The OIS curve (ECBWATCH: Quote, Profile, Research) suggests that two rate hikes are
fully expected by the end of the year with around a 60 percent
probability of a third, assuming ECB liquidity policy is
normalised by year-end. 
 However this current pricing is expected to change depending
on what the ECB does in April, creating opportunities to build
positions, analysts said.
 "The market will probably gradually shift to three rather
than two (rates hikes), especially after the ECB delivers its
first one," said Patrick Jacq, strategist at BNP Paribas.
 "If you are optimistic regarding growth, given the outlook
on inflation, it still makes sense to play steepening at the
front end."
 
 UNRUFFLED BY PORTUGAL, DOWNGRADES
 However, there was little belief that the euro zone's
unfolding peripheral debt problems would derail the ECB's rate
cycle, even as Portugal slides ever closer to asking for a
financial bailout.
 There was also no sign that, as bond markets heaped pressure
on Portugal, there was a wider threat of contagion to interbank
lending, with much of the turmoil having been anticipated since
the turn of the year.
 Market participants said there was limited impact on
unsecured interbank lending from rating agency Moody's decision
to downgrade 30 Spanish banks. [ID:nLDE72N0B1]
 "We don't see any big changes in short-dated lending at the
moment... They were all already more or less problem banks so
the limits on these banks were not too big. I think these are
the guys who get their money at the ECB instead," a trader said.
 Similarly in the repo market, where collateral is sold with
an agreement to be repurchased at a later date, funding channels
showed little sign of the stress that caused Spanish interbank
markets to seize last year.
 "This is related to the fact that most repo transactions in
(Spanish collateral) are passed through central counterparty
clearing, so the direct counterparty risks are already reduced,"
said Giuseppe Maraffino, strategist at Barclays Capital.
 (Editing by Hugh Lawson)

MONEY MARKETS-April ECB hike priced in, Dec outlook less clear