Markets Bring Forward ECB Rate Cuts Expectations — Talking Markets

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Traders have moved swiftly to bet that the European Central Bank’s interest-rate cuts will start earlier than previously thought after it signalled last week that rates may now have hit a peak. Focus is switching quickly to concerns about the eurozone’s fragile economy, though some analysts warn that inflation remains a major risk which markets are turning a blind eye to for now.

Money markets price in a first ECB rate cut towards the end of the first half of next year, having priced in a rate cut for September or October 2024 prior to Thursday’s rate decision, Refinitiv data show. “The market is right to feel confident that it can rule out hikes, and the natural next step is to test the ECB’s guidance and explore earlier cuts," Jamie Searle, rates strategist at Citi, said in a note.

The ECB raised its key interest rates by 25 basis points, taking the deposit rate to 4.0%, and said they had now “reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to target." Analysts say this is prompting markets to bet that “sufficiently long" may not actually be too long. Citi now forecasts 100 basis points of ECB interest rate cuts in 2024, starting in June and bringing down the deposit rate to 3%.

Investors could increase or pull forward rate-cut expectations in the coming months if the eurozone’s economy slows rapidly in response to the ECB’s ten consecutive rate increases since July last year, which total 450 basis points. “If the significant economic slowdown in the coming months continues to unfold as seems likely, markets can be expected to add to 2024 rate cut expectations, especially if core inflation turns lower during the autumn as is widely