European Central Bank meets with investors monitoring potential interest rate cuts
FRANKFURT — The European Central Bank meets this week with investors closely monitoring to see when the Frankfurt institution might start to cut interest rates.
Inflation has declined to 2.4% in November, and with the core inflation also decreasing, investors have increased their bets for ECB rate cuts next year. Money markets are currently pricing in almost 150 basis points of rate cuts next year. The bank’s key deposit rate is at a record high of 4%, after 10 consecutive hikes that began in July 2022 and pushed rates back into positive territory for the first time since 2011.
“The risk is now earlier and larger cuts, and an ECB more capable of decoupling from the Fed,” said Mark Wall, an ECB watcher with Deutsche Bank.
But he believes the ECB will most likely keep its cards close to its chest: “We expect the ECB to keep the guidance that maintaining restrictive rates for sufficiently long will bring inflation back to target in a timely manner.”
Looking ahead, the main policy change at the conclusion of the ECB’s meeting on Thursday might come in the form of a shift in forward guidance — specifically when it will end reinvestments of its PEPP program.
The PEPP, or the Pandemic Emergency Purchase Program, is a flexible bond purchase program introduced during the coronavirus pandemic. The ECB reinvests any maturing securities it gets from its PEPP portfolio, but that could soon change.
“We have indicated that we would continue reinvesting until at least 2024,” ECB President Christine Lagarde told European Parliament lawmakers on Nov. 27.
“This is a matter which will come probably for discussion and consideration within the Governing Council in the not-too-distant future, and we will reexamine possibly this proposal.”
Deutsche Bank’s Wall explained that “if rate cuts are moving forward, the ECB might accelerate the preliminary steps in the exit from PEPP reinvestments.”
“There will be a new round of staff projections for inflation and economic growth in March, which will give the central bank more data to back their data-dependent policy approach and possibly give it room for rate cuts,” he said.
Overall, the ECB’s Governing Council is facing the challenge of addressing the continuing decline in inflation while also managing its balance sheet. The outcome of this week’s meeting may shed light on the direction the ECB intends to take in the near future.