Markets expect interest rate cuts in the first half of this year – Executive Summary

The market is expected to cut interest rates in the euro zone in the first half of this year, but European Central Bank President Christine Lagarde does not want to let down her guard and seeks to curb expectations. .

After 10 consecutive increases in key interest rates, the central bank kept the cost of loans unchanged at the last two meetings, which combined with lower inflation and growth data led markets to expect 2024 to see a cut.

However, the ECB President does not yet want to declare victory in controlling inflation, after he today defended the need for policymakers not to be complacent after the recent decline in the pace of price rises and ruled out any discussion in the ECB Governing Council. Decrease in interest rates..

“The highest interest rates have been seen. In fact, you only have to look at the Eurobor to understand this, with 12 months being the lowest for a few weeks now,” notes IMF Head – Financial Markets Intelligence, Felipe Garcia, in Statements to Lusa newspaper.

The fact that Isabel Schnabel, one of the most conservative members of the ECB, “a few days ago ‘gave in’ by acknowledging the positive development of inflation” shows that “the ECB’s opinion is already changing,” the economist recalls.

“At Lagarde’s press conference, it was clear that the ECB does not want to give in, and is changing its rhetoric more slowly,” he opines.

Felipe Garcia explains that the market will reduce the cuts by about 150 points in 2024, with the first occurring in March or April, that is, six or seven months after the last increase.

“However, I think that central banks in general, including the ECB, will be somewhat reluctant to lower market expectations as much and as quickly as they will want to see the effects of both the increases made and the first cuts and will do so.” We are expected to be afraid of a second wave of inflation.

Following the fastest rate of interest rate increases in the history of the Eurozone, Banco Carregosa Chief Economist Paolo Rosa, speaking to Lusa, confirmed that the money market expects five falls of 25 basis points until the October 27 meeting. From next year, “with a 65% probability that the first 25 basis point cut will take place at the second meeting of the year, on March 7, 2024, to start a new cycle of low interest rates.”

The downward trajectory of inflation has supported market conviction, and the European Central Bank today revised its Harmonized Index for Consumer Prices (HICP) forecasts to 5.4% in 2023 and 2.7% in 2024, when it had indicated in September a rate of 5.6% in 2024. 2023 and 3 .2% in 2024.

The ECB also expects GDP to grow from 0.6% on average in 2023 to 0.8% in 2024 and 1.5% in 2025 and 2026.

ActivTrades Europe CEO Ricardo Evangelista, speaking to Lusa, highlighted that ECB officials “insisted on a more hawkish (restrictive) rhetoric, without assuming that the next step would be a cut.”

“However, this is exactly what financial markets have been discounting, in a dynamic reflected in the weakness of the euro against other major currencies such as the dollar and pound,” he adds.

For the analyst, the first cut should occur during the second quarter of next year and be 25 basis points.

He adds: “Beyond this horizon, it will be difficult to predict other developments, depending on the data that is released, especially inflation, economic growth, employment and wages.”

On the other hand, XTB analyst Henrique Tomé, speaking to Lusa, believes that the interest rate path will continue to depend heavily on the development of economic indicators, noting that the core inflation rate, which excludes the most volatile categories such as food, energy and energy, “remains much higher.” “Who is required?”

“If inflation continues to show signs of slowing, we believe there is no room for further interest rate increases, as economic activity in Europe, especially in Germany, is very fragile. However, talk of an interest rate cut next year seems unlikely,” he said. Although again it depends on the development of economic indicators.

Lagarde's position contrasts with that of US Federal Reserve Chairman Jerome Powell, who indicated on Wednesday that lowering interest rates is a topic for consideration.

He added: “Lagarde tried to avoid the idea of ​​short-term cuts. It wasn't as clear as Powell's yesterday [quarta-feira] Regarding cuts in 2024, but the reason behind this is not well understood because the economic situation in the Eurozone is worse and inflation is lower.

The ECB interest rate applied to the main refinancing operations and the interest rates applied to the marginal lending facilities and deposit facilities are 4.50%, 4.75% and 4.00%, respectively.

After years of interest rates falling to historic lows, the European Central Bank raised interest rates for the first time in 11 years in July 2022, a total of 450 basis points until the latest increase in September.