There are growing expectations that the European Central Bank (ECB) will significantly lower interest rates next year. Traders believe the country will have to react to the economic slowdown.
For the first time, the swap market has priced in next year’s rate cut to be 1 percentage point. Two months ago, a rate cut of 0.75 points was envisaged.
UK retail sales unexpectedly fell in October, US data shows inflation is slowing. The bear market in oil prices has also reignited concerns that the global economy is heading toward recession. Short-term money markets are also pricing in a 1-point cut in U.S. interest rates next year.
However, the market’s attention is currently focused on the possibility of lower interest rates rather than an economic slowdown. Bond prices rose this week, with Germany’s 10-year bond yield dropping nearly 20 basis points (bp, 0.01%) to about 2.52%.
Officials have repeatedly said it is too early to start thinking about monetary easing and intend to keep interest rates high for a long time. But markets are becoming less convinced as evidence mounts that the series of steep interest rate hikes is starting to hurt the economy.
Bank of France Governor Villeroy-de-Gallou, a member of the ECB’s policy committee, said in a speech on Monday that the ECB’s decision to suspend interest rate hikes in October was fully justified by slowing inflation. He also noted that the pace of price increases had slowed significantly since the ECB began tightening last year, and that indicators of underlying inflation had clearly passed their peak in spring this year.
Original title: Traders Raise Bets on ECB Cuts to 100 Basis Points Next Year (1), Traders Add to ECB Rate Bets, Fully Price 100bps of Cuts in 2024 (excerpt)
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