ECB warns of excessive market optimism and expects to cut its forecasts by just 75 basis points | Financial markets

ECB President Christine Lagarde yesterday at the Davos Forum acknowledged the possibility of lowering interest rates in the summer. For the first time, he dared to point out the moment of the cut that the market had been waiting for months, and did so only when the market’s expectations of lower interest rates began to cool. The commitment to downsizing continues, albeit with less intensity…

ECB President Christine Lagarde yesterday at the Davos Forum acknowledged the possibility of lowering interest rates in the summer. For the first time, he dared to point out the moment of the cut that the market had been waiting for months, and did so only when the market’s expectations of lower interest rates began to cool. The commitment to reduction remains, although with less intensity than in the final period of 2023. In fact, rising bond prices are a cause of concern for the ECB and a threat that “could derail the disinflationary process,” according to the published minutes of the December 14 meeting.

This meeting took place in complete market euphoria in anticipation of a rate cut in 2024. The first drop occurred in April of this year and a decline of almost 140 basis points in the price of money in the eurozone during this event. Now such expectations are moderated, and the ECB is guiding the market towards summer as the time for the first rate cut. And all this after acknowledging, as outlined in the minutes of the December meeting released today, the risk associated with the market’s haste in anticipation of such cuts and the slowness of such cuts, which the ECB manages in its own economic forecasts.

Minutes released today show the general view was that market expectations reflected significant optimism and fell short of the ECB’s technical services forecasts, both in terms of the inflation outlook and the rate path included in the technical assumptions. Thus, such projections include rate cuts of just 75 basis points through 2024, according to the minutes.

The document also reflects the ECB’s Governing Council’s concern that a strong adjustment in bond yields, without taking into account intensive rate cuts, risks excessively easing financing conditions, which could derail the disinflationary process. In this sense, “it was widely considered important to disregard market expectations in post-meeting communications.”

The ECB’s Governing Council also discussed in December the possibility that markets could see another change of heart in the coming months. They recalled how dramatically expectations had changed compared to September and October, when yields rose due to talk of higher rates for a longer period. At the moment, and 2024 has just begun, the market has already slightly adjusted expectations and the bet is no longer on the first rate cut in the eurozone in March, but rather on the summer, as the ECB is already suggesting.

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