ECB set to cut rates again
The Fed left interest rates unchanged at 4.25%-4.5% following yesterday’s meeting, as widely expected, and said it needed to see further progress on inflation falling towards the 2% target before considering lowering them again. The market reaction was muted enough. In FX, the euro and sterling, which lost ground to the dollar early in yesterday’s session but had recovered ahead of the Fed meeting, were little changed following the decision. They are trading at about $1.0420 and $1.2450 respectively this morning, largely in line with yesterday morning’s levels, while EURGBP is a touch softer at around £0.8370. Next up it’s the ECB, which is expected to cut rates by 25bps at today’s meeting, taking the deposit rate to 2.75%.
US bond yields were also little changed post the Fed decision with 10-year yields ending flat on the day, while US stocks finished marginally lower with the S&P 500 down around 0.5%. European bond yields are edging down this morning ahead of the ECB meeting later.
Having cut interest rates at each of its previous three meetings, the Fed remained on hold yesterday, saying it was in no hurry to lower them again and that it would need to see “real progress” on inflation falling further towards 2% before considering doing so. Regarding the new US administration, the Fed said it is waiting to see what polices it will implement before determining what effect they may have and the appropriate monetary policy response to them.
The ECB is set to cut the deposit rate by another 25bps to 2.75% at today’s meeting, which would bring the cumulative reduction since June last year to 125bps. Economic activity in the Euro area remains weak and headline and core inflation are expected to fall to the 2% target over the course of this year. Monetary policy remains restrictive, so the ECB is likely to continue lowering rates over the coming months as it moves toward a more neutral setting for rates, generally considered to be in the vicinity of 2%. The market sees the deposit rate being lowered by 75bps to 2.25% by June (including today’s expected 25bps reduction) and is pricing in the best part of another quarter-point reduction by end-2025.
Apart from the ECB meeting, today also sees the release of Euro area and US GDP data for the final quarter of 2024. The consensus expects growth in the Euro area to have slowed to 0.1% (quarter-on-quarter) from 0.4% in Q3, while quarterly growth in the US is forecast to have remained solid at around 0.7%, broadly in line with the Q3 outturn.