ECB rate rise expectations, market inflation gauge tumble after weak PMI

LONDON (Reuters) - Investors further scaled back expectations for a rise in euro zone interest rates next year, while a key market gauge of inflation expectations fell on Friday to its lowest in a year following weak economic data from the bloc.

Euro zone business growth was much weaker than expected this month as exports fell sharply, hurt by a slowing global economy and an ongoing United States-led trade war, a survey showed on Friday.

The difference between the overnight bank-to-bank interest rate for the euro zone (Eonia) and forward Eonia rates dated for the European Central Bank's December 2019 meeting was at 8.8 basis points, down from around 9.5 bps on Tuesday and over 10 bps on Monday.

That indicates investors are pricing in a less than 90 percent chance of a 10 basis point increase in the ECB's deposit rate -- the minimum it is likely to increase -- from minus 0.4 percent currently for next year. They had fully priced in such a move at the start of the week.

Friday's weak data also knocked inflation expectations.

The five-year, five-year breakeven forward, a key market gauge of long-term inflation expectations tracked by the ECB, fell to 1.6462 percent -- its lowest level since November 2017.

(Reporting by Dhara Ranasinghe; editing by Sujata Rao)