ECB to hold, ECB to hike
The euro and sterling have both moved up off yesterday morning’s lows against the dollar to trade circa half a cent higher at about $1.1740 and $1.3370 respectively, leaving EURGBP still hovering just below £0.88, ahead of today’s ECB and Bank of England (BoE) interest rate announcements. The ECB is expected to leave the deposit rate at 2% for a fourth consecutive meeting, while its updated growth and inflation forecasts are likely to point to steady policy ahead, in line with current market expectations which envisage rates remaining essentially unchanged through 2026. The BoE is set to cut rates by 25bps to 3.75%, bringing the cumulative reduction since August 2024 to 150bps, though the vote to do so may be tight. Meanwhile, on the economic data front, CPI inflation for November in the US is the key release today.
UK government bonds outperformed on the back of the larger than expected fall in (UK) inflation in November, with yields finishing 4-6bps lower across the curve. US and German yields didn’t do a whole lot, both ending flat to very marginally higher along the curve. In equity markets, US stocks fell again, with the sell-off gathering pace as the Nasdaq shed almost 2% amid continuing concerns around the ‘AI story’, while European stocks closed around half a percent lower on the day.
Fed Governor Waller – who is among the contenders to be the next Chair of the central bank – says interest rates are still up to 100bps above a neutral level (notwithstanding the recent cuts), but he notes that, because inflation is still above target, “we can take our time – there’s no rush to get down – we just can steadily bring the policy rate down towards neutral”. The market is currently pricing in about 60bps worth of cuts next year.
Today’s CPI report in the US is expected to show headline and core inflation at 3.1% and 3.0% respectively in November, according to the consensus forecast, versus 3% for both in September (because of the recent government shutdown, inflation data have not been compiled for October). Other data scheduled for release include weekly jobless claims in the US and construction output in the Euro area.