ECB cuts again, more to come

The ECB lowered the deposit rate by another 25bps to 3% yesterday, the fourth quarter-point cut since June this year, and indicated there’s more to come – the market sees a further reduction of 100bps over the first half of next year – noting that inflation is now expected to settle at around the 2% target “on a sustained basis”. The euro has lost some further ground to the dollar, trading at around $1.0470, but it is firmer against sterling, at about £0.8290, with the pound shedding the best part of a cent against the dollar yesterday and slipping further this morning, to around $1.2630, after the release of weaker than forecast UK GDP data.

Bond yields rose yesterday, led surprisingly enough by German bonds, and by 10-year yields in particular, which ended the day almost 10bps higher (at 2.20%), with equivalent US and UK yields both increasing by about 5bps (to 4.33% and 4.36% respectively). In equity markets, European stocks were little changed while US indices were about 0.5% lower.

The ECB has once again revised down its forecasts for Euro area GDP growth in 2025, with the economy now expected to expand by 1.1% (previously 1.3%), while inflation is forecast to run very close to the 2% target through most of next year, dipping to 2% in the final quarter. The ECB’s post-meeting statement dropped a reference to the need to maintain a “sufficiently restrictive” monetary policy stance in order to return inflation “sustainably” to target, paving the way for interest rates to be lowered (in the first instance) to a neutral level, generally considered to be around 2%.

The UK economy contracted slightly for a second month running in October, with GDP falling by 0.1% (+0.1% was expected) according to this morning’s data. Over the three months to October GDP grew by just 0.1%, down from 0.3% in the three months to July, with output increases in services and construction offsetting a decline in industry. Separately, consumer confidence improved for a second month in a row in November, albeit only slightly so, according to the GfK indicator.

Looking to the day ahead, industrial production data are due in the Euro area and import/export prices are scheduled in the US.