BRUSSELS, Jan 26 — Money markets boosted their bets on future rate cuts today after European Central Bank president Christine Lagarde didn’t push back against the pricing of future monetary easing while appearing less worried about the inflation outlook.
The ECB held interest rates at a record-high 4 per cent yesterday and reaffirmed its commitment to fighting inflation even as the time to start easing borrowing costs approaches.
ECB euro short-term rate forwards priced 147 basis points of rate cuts in 2024, from around 140 late on Thursday and 130 before the ECB press conference.
“The lack of (any) explicit pushback to the start, pace and scale of policy easing priced by the market was, in effect, a green light to price an earlier, faster and deeper cycle,” said Rohan Khanna, head of euro rates strategy at Barclays.
Germany’s 10-year government bond yield, the benchmark for the euro area, dropped 3.5 bps to 2.25 per cent.
Analysts argued that on Thursday Lagarde had cautiously laid the ground for a policy pivot, with the wording expressing higher confidence in inflation’s downward path.
However, she also said that more reassuring data would be needed and that rate cuts were not discussed.
The incoming wage figures and the macro projections at the March 7 meeting will be key for the timing of the rate cut.
“Whether intentionally or not, the Governing Council opened the door today to an early rate cut (March or April),” Citi economists said in a research note.
“We are now turning towards communication by individual governors to confirm or not this dovish inflexion in policy,” they added. “Any pushback in the coming days may reveal the true depth of dovishness.”
Money markets priced an almost 85 per cent chance of a first 25 bps rate cut in April and an around 20 per cent chance in March.
The ECB hawk Martins Kazaks said on Friday the worst mistake would be cutting rates too early.
Market participants label as hawks central bank officials inclined to advocate a tight monetary policy to control inflation, while doves focus more on economic growth and the labour market.
ECB policymakers are open to a change in their rhetoric at their next meeting, paving the way for an interest rate cut, possibly in June, if upcoming data confirms inflation has been vanquished, four sources told Reuters.
Italy’s 10-year government bond yield, the benchmark for the euro area periphery, fell 4.5 bps to 3.78 per cent.
The gap between Italian and German 10-year yields was at 152 bps.
The ECB said it will continue to reinvest, in full, the principal payments from maturing securities purchased under the Pandemic Emergency Purchase Programme (PEPP) during the first half of 2024, in a move that will support peripheral bonds.
The central bank can use PEPP reinvestments to buy bonds of highly indebted countries. — Reuters
