ECB considers rate cut bets ‘inconsistent’

The European Central Bank (ECB) is pushing back against investor bets that it will cut interest rates aggressively this year. As reflected in the minutes of the last monetary policy meeting held on December 14, Members of the government council believe that market expectations of a reduction in the price of money “do not correspond to macroeconomic forecasts.”

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The European Central Bank (ECB) is pushing back against investor bets that it will cut interest rates aggressively this year. As reflected in the minutes of the last monetary policy meeting held on December 14, Members of the government council believe that market expectations of a reduction in the price of money “do not correspond to macroeconomic forecasts.”

Central bankers see “considerable optimism” among investors, which does not match their perception of the evolution of inflation. In fact, at the last summit, ECB members discussed potential risks to rising prices in the coming months if wage negotiations lead to stronger-than-expected growth or if geopolitical risks re-emerged that could push energy prices higher.

In this context, representatives of the monetary authorities expressed concern about the market’s aggressive bet on rate cuts. In his opinion, his position “threatens an excessive easing of financing conditions, which could disrupt the process of deflation” that the economy has been experiencing for several months.

For this reason, the majority of Governing Council members noted the importance of not being complacent with market expectations and called for this stance in communications to be abandoned after the December summit. This strategy could frame statements made by ECB President Christine Lagarde on Wednesday in an interview with Bloomberg in Davos, where she noted that the first drop in interest rates this summer came later than investors expected. .

Like Lagarde, other members of the Executive Committee also tried to cool investor confidence in line with what they discussed at the December summit. ECB chief economist Philip Lane, considered a monetary dove, recently said that lowering the price of money “is not a topic of debate in the short term.” Isabelle Schnabel, a member of the executive committee and a hawk, also supported him, noting that “it is too early to talk about lowering interest rates.”

Modesty

But there were also members of the ECB’s Governing Council who chose not to judge the state of the market and showed a certain “humility” given the significant level of uncertainty around inflation forecasts.

In this sense, some central bankers, who understand from the transcript of the meeting that they are in the minority, emphasized that “if inflation unexpectedly declines again, the current level of interest rates may become too tight, leading to the need to cut them.” as the market expects, so it is understandable that they would prefer not to cool these expectations so much as not to tie their hands if they later have to act faster.