Investors expect the European Central Bank (ECB) to start lowering interest rates as early as March, and that total interest rates are expected to fall by 1.5 percentage points by the end of next year. The reason for the forecast is the deterioration of the economic situation of the European Union economy.
Investors expect the ECB to start lowering interest rates as early as March next year. In total, an average of six interest rate cuts are expected for next year, which should bring the interest rate on fixed deposits from the current 4% to 2.5%.
The expectation of a rapid lowering of interest rates is based on the worsening of the economic situation in the European Union.
On Wednesday, the German Statistical Office announced that in October the volume of new orders in the industrial sector decreased by 3.7% compared to September. The annual decrease was as much as 7.3%. This was worse than expected, as economists polled by Reuters had predicted that orders would remain unchanged on a year-on-year basis.
The ECB Council meeting will be held next week. The Council is expected to leave interest rates at their current level, but new central bank economic forecasts to be released after the meeting show lower economic growth and inflation forecasts than before.
Eurozone inflation has remained below market expectations for three consecutive months. In November, annual inflation in the euro area was just 2.4%. At the same time, the core inflation indicator, which does not take into account changes in food and electricity prices, remained significantly higher at 3.6%. The ECB aims to bring both indicators closer to 2%.
Investors’ hopes for a quick rate cut were confirmed when ECB board member Isabel Schnabel, previously known for her tough views on monetary policy, called the decline in inflation significant and said that further rate hikes of interest are unlikely.
Mark Wall, economist at Deutsche Bank, Germany’s largest commercial bank, told the Financial Times that according to his forecasts inflation should continue to fall, which is why a reduction in interest rates is not ruled out already at the ECB meeting of March.
While investors expect the US and UK central banks to also start cutting interest rates next year, the expected cut is the largest among those of the Eurozone’s three major central banks. While it was previously thought that the ECB would be the last to cut interest rates, it is now expected that the US Federal Reserve and the Bank of England will only start cutting interest rates after the ECB’s decision.
“There is a very good chance that we will start describing Europe in 2024 in the same way we described it in 2019. [Toona peeti Euroopat] as a region characterized by chronically insufficient aggregate demand,” said Bank of America analyst Ralf Preusser.
2023-12-06 15:46:00
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