The ECB is ready for another rate cut: what to expect
Clarification on inflation expectations, touching the two per cent target
3' min read
3' min read
A new cut. Definitely not the last. Expectations for the December meeting of the European Central Bank indicate, with little doubt, that the outcome of the Governing Council meeting will be a further reduction of the cost of money: the deposit rate could thus fall to 3%, from 3.25%, and the reference rate to 3.15%. Assuming - on the basis of the ECB's own indications - that the neutral rate is around 2.50 per cent, it can be said that the normalisation manoeuvre is nearing an end.
Inflation expectations at 2%
.The December projections, which will be published during the press conference, will give more precise indications as to how far we still have to go. At the moment, macroeconomic data indicate, with some caution, that the path is almost complete. Long-term inflation expectations, as measured by the quotations of the inflation rate swaps, are back below the two per cent target for the first time since March 2022.
Prices still relatively fast
.Some caution remains advisable, linked to the trend in inflation measured by the consumer price index, which, although it looks back to the past, albeit recent, still signals a situation that is not entirely satisfactory. The acceleration of the overall index to 2.3% was widely expected by the European Central Bank, but the core index continues to move, stubbornly, at an annual rate of 2.8%. This is still higher than the level recorded from '99 until the end of 2021 (thus excluding the recent inflationary flare-up).
Services always overheated
.Still moving fast are the prices of services, which show no signs of slowing down. They continue to advance at a 4% pace year-on-year and even quarterly and half-yearly (annualised) increases do not yet give any indication of a slowdown. Although there is no shortage of analysts - among them Mark Cus Babic of Barclays - predicting continued disinflation through 2025.
Yields at March 2023 levels
.Markets have responded well to monetary policy stimulus. Yields have fallen relatively quickly this year. The short-term part of the curve that expresses and implements monetary policy is now below 3% for the first time since March 2023 while the effective euro exchange rate is slowly moving away from its long-term average (but remains far from the local low of August 2022, shortly after the first rate tightening). The bias is thus becoming less and less restrictive.
