Traders step up ECB rate cut bets, sensing shift on inflation front
(This Jan. 25 story has been refiled to add the missing word 'Central,' in paragraph 1)
By Yoruk Bahceli and Naomi Rovnick
LONDON (Reuters) — Traders on Thursday piled on bets that the European Central Bank will cut interest rates from April as they took the view that policymakers are growing more comfortable with the inflation outlook.
After the central bank kept its key rate on hold at a record 4%, ECB chief Christine Lagarde repeated twice in a news conference that it was «premature» to discuss rate cuts.
But with the comments it made on inflation and wages, the bank was seen as appearing less concerned about inflation than before. It was noted that the ECB had removed a mention that «domestic price pressures remain elevated, primarily owing to strong growth in unit labour costs,» from its decision, for instance.
Markets took that as a sign the bank is becoming more convinced that wage growth, which it has flagged as the biggest risk to inflation, is slowing, analysts said.
Interest-rate sensitive two-year bond yields fell sharply as traders doubled down on rate cut bets. They now expect more than an 80% chance of a first 25 basis-point (bps) rate cut in April, up from around 60% before the meeting.
They anticipate 140 bps of cuts this year compared with around 130 bps before the meeting.
«The key takeaway for markets is that April is a live meeting,» said Danske Bank chief analyst Piet Christiansen.
«Markets are saying, if inflation and wage growth is coming in… they will turn around and guide to a policy rate cut in April,» Christiansen added, noting the rally in bonds reflected a lack of ECB pushback against market rate bets.
German and Italian two-year bond yields dropped around 10 bps in their biggest fall in
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