The ECB will continue to cut on January 30 with another 25bp reduction in the policy rate to 2.75%, and markets expect the policy stance outline to remain unchanged from December, Deutsche Bank analysts report.
The ECB will cut 25bp in each of the four meetings of the first semester
“The interpretation between the lines will be consistent with further rate cuts: the policy stance will continue to be described as restrictive and the ECB will remain confident that inflation is on the right track. There will be no predefined path for policy and the terminal rate will be around above/at/below neutral depending on the data that the ECB will evaluate meeting by meeting. The main risk in January is that the adjustments to the description of the recent data lean a little towards a hawkish line compared to December (. For example, prices of higher energy prices, domestic inflation unchanged).
“In this Preview, we explore the possible tension between the ECB’s growing confidence in the return of inflation to target and the growing dual risks around this central view. These views are consistent with a return to neutrality but at a pace gradual. That is, a shock would be required for the ECB to cut 50bps. We also think about neutral rates and when the ECB could start to “tread carefully” or slow the pace of cuts from the current 2 quarter cuts. from point per quarter to one cut per quarter – we believe that from the third quarter, the risk is the second quarter. Finally, we think about the macroeconomic data that will be most important for the ECB when making these decisions.
“Our baseline forecast for the ECB has not changed. We expect the ECB to cut 25bps in each of the four Governing Council meetings in the first half, reducing the policy rate to 2.00% by mid-year. In the second half , we expect the pace of cuts to slow down We expect a cut of 25bp per quarter in the second half – cuts in the September and December meetings – with a terminal rate of 1.50% at the end of the year, modestly. “below neutral. This view is based on the assumption of below-trend growth, inflation moderately below target, and risks to inflation that are biased to the downside.”
Source: Fx Street

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