Financial markets expect interest rates in the euro area to start falling sharply this year. At the same time, members of the Council of the European Central Bank warn that these expectations are too optimistic, because inflation is still too much above the desired level of 2%.
Economic analyst Peeter Koppel said there are many confusing signals in the market and there is no clarity on where the economy will move. Financial markets are already predicting that the Eurozone’s base interest rate will fall to 2.5% this year.
“Actually the market is betting that at the end of the year we will be talking about interest rates of 2.5. Apparently, the central bank does not like this market expectation very much and it does not seem realistic, and therefore they are trying to reduce these expectations with their rhetoric,” Koppel said.
Considering that today the interest rate is 4%, in my opinion the interest rate will be 2.5% by the end of the year is a rather aggressive expectation,” said Madis Müller, president of Eesti Pank .
“The market has estimated that interest rates will fall by about 1.5% by the end of the year. It certainly depends a lot on how strong wage growth will be, which certainly supports inflation, and how strong it will be the economy. If the economy were to suddenly go down, then the central bank is certainly ready to lower interest rates faster and to do so in 0.5% increments at a very rapid pace,” said Peter Priisalm, head of Avaron’s investments.
Müller’s colleague at the Austrian National Bank warned on Monday that no interest rate cuts should be expected this year. Müller said inflation should approach the desired level of 2%.
“One thing we could at least wait for is how wage growth will develop in the euro area as a whole. We can see that wage growth has slowed down in Estonia, not so clearly in the euro area. According to the latest data, Average wages are growing at a pace of around 5% across Europe, and if this pace remained that fast, not quite in line with the 2% price increase,” Müller said.
The six-month Euribor for real estate mortgage interest has already fallen from its peak and is expected to be reflected in mortgage payments for the foreseeable future.
“Expectations have already been expressed regarding the Euribor drop. If everything goes according to plan, interest rates could fall in April. We will see if this happens in a few months,” said Anne Pärgma, head of real estate loans at Swedbank . .
2024-01-16 16:43:00
markets-and-central-banks-have-a-different-view-on-interest-rate-cuts-economy