Investors Are Betting on ECB Rate Cuts

Traders are ramping up bets the European Central Bank will cut interest rates next year, just one week before its policy meeting.

Swap markets earlier Wednesday began pricing close to six quarter-point cuts by the end of 2024 after eurozone inflation slowed more than expected in November. However, bets were slightly diminished after Deutsche Bank revised its outlook to expect lower borrowing costs next year, Bloomberg reported.

One of the ECB's more hawkish members, Executive Board member Isabel Schnabel, told Reuters that a further rate increase was "rather unlikely" due to the "remarkable" decline of inflation. That's a major shift for the ECB member, who is seen as one of the most influential voices among conservative policymakers.

Eurozone inflation sank to 2.4% in November, falling well below expectations for the third month in a row. Core inflation — which excludes energy and food — remains above the ECB's 2% target for inflation, sitting at 3.6%.

"Given the latest inflation data and the tone of official commentary, we fear we were too timid," Deutsche Bank economists wrote in a report to clients Wednesday. "The risk is now earlier and larger cuts, and an ECB more capable of decoupling from the Fed."

The bank is scheduled to meet next week and is expected to lower its forecasts for both growth and inflation, which is likely to strengthen the belief that rates will be cut, according to The Financial Times.

“The moment you say you aren’t going to hike again, that means the next move is a cut and opens the door to investors speculating on how soon that will happen,” Frederick Ducrozet, the head of macroeconomics at Pictet Wealth Management, told the Financial Times.

Deutsche Bank's economists said the first cut could come as soon as the ECB's meeting in March.

The Federal Reserve is also expected to cut interest rates, although investors are currently pricing in the first rate cut to occur in May and five cuts by the end of the year. Traders in the U.K. expect the Bank of England to make three cuts over 2024, according to the Financial Times.