Markets bet ECB will cut rates 1% next year as eurozone splutters

Just two months ago, the expectation was that the European Central Bank would deliver a 75 basis-point decrease, according to swaps-pricing tied to central-bank meeting dates.

Bets on similar easing by the Bank of England also accelerated after weaker-than-forecast UK retail sale numbers. 

Traders are also anticipating 100 basis points of cuts by the US Federal Reserve next year, with signs of cooling US price pressures on show this week. 

Plus, oil’s descent into a bear market has reignited worries about a recession.

ECB policymakers have begun to debate the timing of potential rate cuts, though that discussion has incited some pushback. 

Greek central bank governor Yannis Stournaras has said that officials could consider easing in the second half of 2024, while his German colleague, Joachim Nagel, has pushed back on that prospect.

A cut in ECB interest rates won’t be happening in the near future, Mr Nagel said. 

Borrowing costs “have to remain at a high level for a sufficient period”, Mr Nagel said in Frankfurt. “While it is impossible to predict exactly how long this period will be, it is highly improbable that it will end anytime soon.”

Mr Nagel, who has repeatedly said that it’s too early to talk about lowering borrowing costs, emphasised that it isn’t even clear if the ECB is at peak rates, as consumer-price growth — currently at 2.9% — might still be affected by geopolitical shocks.

“To avoid the economic damage caused by inflation being too high for too long, we need to restore price stability,” he said. 

Mr Nagel was more upbeat, saying that he’s “optimistic that we can avoid a hard landing of the economy”. 

As of now, it is too early to declare victory over inflation.”

Last week, ECB president Christine Lagarde said that any such reduction isn’t going to happen “in the next couple of quarters”, adding that “long enough is long enough”. She omitted the topic from a speech in Frankfurt yesterday. 

As evidence builds that an aggressive string of rate hikes is starting to take a toll on the economy, it’s becoming harder to convince the market to follow the mantra of “higher for longer”. 

Germany’s 10-year yield has fallen almost 20 basis points this week, to about 2.55%, and the Stoxx 600 Index touched a one-month high. Ireland’s 10-year bond was trading at 2.96%, also down sharply in the past week.

Wagers by traders around the world that pull forward the timing of rate cuts are causing some unusual market dynamics, according to Steven Barrow, head of G-10 strategy at Standard Bank. 

Swaps-pricing suggests that there’s a high probability that the US Fed will start cutting rates from May, with the ECB following suit a month later and the Bank of England starting in August, he said. 

“We think it is wrong,” Mr Barrow wrote in a note. “We find it strange that the market prices such an early Fed move when the economy is so much more robust than that we see in Europe.”

The record tightening spree has taken a toll on the economy, which has struggled to grow this year. 

This week, the European Commission predicted that the region will avoid a recession, yet ECB governing council member Mario Centeno said that he’s concerned whether or not the eurozone will have a soft landing following a lack of growth in recent quarters.

Bloomberg