Sharing his thoughts ahead of the next ECB interest rate announcement tomorrow, Joe McConnell, European Liquidity Strategies Portfolio Manager at J.P. Morgan Asset Management comments as follows:
“Tomorrow, the ECB is almost certain to deliver the rate cut that investors have on their Christmas wish list.
Recent weakness in the PMI business surveys, with the service sector now contracting alongside the manufacturing sector, provides plenty of reason for the ECB to cut rates. While some have been hoping for a 0.5% cut, recent commentary from ECB members suggests we’re more likely to see a 0.25% rate cut.
The weakness in the business surveys, combined with the potential for tariffs on European exports to the US increases the risk of a European recession. Service sector inflation momentum is also moderating with the 3 month over 3 month annualized rate falling to only a little above 2%.
This backdrop leads us to believe the ECB will cut rates by 0.25% at every meeting between now and June, taking the deposit rate down to 2% by the middle of next year.
However, with the market already expecting rates to be cut below 2% next year, we think that investors may be hoping for too much. For rates to fall by more than is currently priced in, inflation will have to be very well behaved, and the economy very badly behaved in 2025!”
