Sept 12 (Askume) – Traders on Thursday lowered expectations for further interest rate cuts by the European Central Bank for the rest of the year as policy makers did not clarify whether they would double down on monetary easing.
Shortly after the ECB meeting ended on Thursday, sources told Askume that unless there was a significant deterioration in the economic growth outlook, the central bank was unlikely to cut interest rates further at its next meeting in October.
The Bank had earlier cut interest rates for the second time this cycle , reducing the key deposit rate to 3.50%, in line with expectations, but reiterated that services inflation remains high and interest rates will remain adequately restrictive as long as necessary.
European Central Bank President Christine Lagarde said the path to setting interest rates is not predetermined and the central bank will make decisions at each meeting without any prior commitment.
Ahead of the meeting, traders were betting that interest rates would be cut by more than 30%, including a 25 basis point cut to about 20%.
For the full year, excluding Thursday’s move, he now expects a rate cut of 33 basis points, down from 36 basis points on Thursday.
“Lagarde did exactly what she wanted to do — not disrupt the market,” said Peter Christiansen, chief analyst at Danske Bank.
“He seems comfortable with the current market price of about 25 basis points (of reductions) per quarter.”
Yields on euro zone government bonds rose as traders lowered expectations for a rate cut.
German two-year bond yields, which are sensitive to these changes, rose about 10 basis points, their biggest one-day gain in about a month.
The euro rose, last trading 0.25% higher at $1.10393, as European stocks closed higher on Thursday (.STOXX) .
Deviations
Traders are more confident that the Federal Reserve will continue to cut interest rates from next Wednesday, so the focus will be on the impact on the market of differences between the European Central Bank and the Atlantic Central Bank.
Traders expect the Fed to cut rates by about 100 basis points this year, starting with a 25 basis point hike, meaning they will likely see a sharp 50 basis point reduction at one of the three meetings.
Traders expect the Federal Reserve to cut interest rates by 25 basis points 10 times by the end of next year, while the European Central Bank will cut rates 6 times.
Since currency effects are the main means by which the Fed’s actions influence the ECB’s thinking, analysts said the ECB will need to continue to pay attention to the euro’s strength.
A stronger currency could unnecessarily tighten financial conditions in the EU’s sluggish economy.
Danske Bank’s Christiansen said one factor that could help raise risks to the European Central Bank’s October meeting could be an “aggressive” decision by the Federal Reserve next week, though markets are now pricing in a 50 basis point rate cut, or about 20%.
However, despite the small ECB rate cut, analysts do not expect the euro to rise further. A recent Askume survey predicts the yuan will rise to $1.11 by the end of February and $1.12 within a year, not far from its August peak.
James Athey, manager of fixed-rate funds at Marlborough, said anyone investing in the euro would be “fundamentally banking on a pro-growth environment while the rest of the world outperforms the US”.
Some investors say there is more potential for gains in euro zone government bonds, which lag U.S. Treasuries and have seen yields fall this summer.
“The safest part (of the bond market) is in Europe,” said Mario Baronchi, a multi-asset fund manager at Fidelity International.
“If you look at the curve in the US, the market has brought it down by about 250 basis points over a couple of years. That’s a big number. So, I would prefer to be in Europe.”
As the European Central Bank lowered its growth forecasts for this year and next year due to weak domestic demand, but still expects inflation to reach the 2% target in the second half of 2025, some investors are focusing on the risks the European Central Bank may face. Best.
Indeed, the group’s recovery has been slow ,The German economy shrank in the second quarter .
“If the ECB cuts interest rates gradually, the economy will not get the boost it needs,” said Seema Shah, chief global strategist at Principal Asset Management.
“Fundamentally speaking, Europe is not as investable as the rest of the world,” Shah said.
