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Responding to the European Central Bank’s (ECB) decision to keep interest rates unchanged, financial markets have adjusted their expectations for the extent of potential rate reductions in the coming year. ECB officials emphasized no discussions about rate cuts took place.
Bloomberg reported that traders have scaled back their bets on the magnitude of interest rate cuts by the ECB in 2024. Swaps tied to ECB policy meeting dates now indicate expectations of less than 150 basis points of rate reductions, compared to the 165 basis points priced earlier during the trading session.
The revision also extends to the timing of the first potential rate cut, with a 70% probability attributed to a quarter-point cut in March, down from an earlier estimate of 80%. The ECB left its deposit rate at 4%, maintaining its highest level over two decades. Policymakers conveyed a cautious stance, emphasizing that it is premature to declare victory over inflation.
Over the past month, market sentiment has witnessed a surge in expectations of ECB rate cuts, with projections ranging from three quarter-point cuts to at least six in 2024. This shift in sentiment aligns with the recent deceleration in inflation to 2.4% in November from its peak above 10% last year.
Despite the inflationary concerns, the euro-area economy is exhibiting signs of weakness. Analysts surveyed by Bloomberg predict a contraction in gross domestic product (GDP) for the year’s final months, potentially marking the region’s first recession since the pandemic.
The ECB’s cautious approach underscores the delicate balance it faces in navigating economic challenges while addressing inflation concerns. As market participants recalibrate their expectations, the central bank monitors data points, making data-dependent decisions to steer the eurozone economy through uncertain times.
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