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ECB rates will fall to 2.5% in 2024. Market forecasts

Bets are increasing on how much the ECB will really ease its monetary policy in 2024.
Markets are pricing in interest rate cuts of as much as 150 basis points next year, with the first reduction in the cost of money arriving as early as March.
Falling inflation and the words of some members of the central bank, as well as growing fears of a recession in the Eurozone are the basis of such optimistic forecasts about a turning point in monetary policy.
It is expected that interest rates could fall to 2.5% in 2024, with the European Central Bank cutting the cost of money before any other, including the Fed.
The markets' bets, however, have so far been quite distant from the more cautious words from both US and European officials.
The risk, in fact, is that the wait for rate cuts turns out to be disappointing in reality.
ECB rates at 2.5% in 2024: markets believe it Investors are now almost certain that Europe will lead the world's major central banks in interest rate cuts after one of the region's most aggressive politicians described the slowdown of inflation as “encouraging”.
The reference is to the words of the ECB "hawk" Schanbel, according to whom inflation is showing a "considerable" slowdown and another increase in financing costs is "rather unlikely".
The markets had long rejected the possibility of further tightening, but until now the German official had warned that it was too early to rule out further increases.
The interview given to Reuters on December 5, however, gave new life to traders' expectations even if Schnabel made no reference to rate cuts.
However, sentiment is very positive today.
Markets are pricing in six quarter-point rate cuts by the European Central Bank for the first time in 2024, a move that would see the key rate fall 150 basis points to 2.5%.
There is also a nearly 90% chance that the easing cycle will begin in the first quarter of next year, a scenario barely contemplated just three weeks ago.
read also Europe, what is happening with such high rates? An answer in a graph The key to this market enthusiasm is euro area inflation, which has fallen rapidly in recent months, below median estimates for three consecutive surveys.
The 2.4% year-on-year rate for November, down from 5.3% in August, is closer to the ECB's 2% target than in any month since mid-2021.
Last week, it also , French bank governor Francois Villeroy de Galhau said that “barring any shocks, rate increases are now over” and thus strengthened the prospect of cuts next year.
What to expect about interest rates in Europe and around the world If investors are right, the ECB will be the first major central bank to cut rates next year and implement its strongest easing cycle.
However, some of Wall Street's biggest analysts are already warning that expectations of cuts from central banks around the world appear too optimistic.
The Federal Reserve is expected to make its first move in May and lower rates by 125 basis points.
In the UK, markets are currently pricing in three quarter-point cuts from the Bank of England starting in June, and a 40% chance of a fourth intervention.
Only two denominations were priced a month ago.
read also Why are the markets "against" the Fed and the ECB? Rates markets in Australia have gone from betting on another hike by mid-2024 to predicting a greater than 75% chance of a cut by then.
And New Zealand's central bank – which last week said it may have to raise rates next year – is also expected to cut its benchmark by May.
In this context, bonds rose in November enough to be archived as a record month.
and German 10-year government bond yields have fallen more than 45 basis points over the past month.
Caution, however, still seems to be the right advisor in predicting what to expect in the future.
While effectively ruling out another rate hike, Schnabel said, in reference to potential cuts, that “we should be careful about making statements about something that will happen in six months.” His colleagues Boris Vujcic have ruled them out for the foreseeable future, while François Villeroy de Galhau said the ECB will look into the issue during 2024.
This caution is also gaining traction on Wall Street, with BlackRock strategists saying “ see the risk that these hopes will be dashed." Allianz SE chief economic advisor Mohamed El-Erian warned that the Fed is losing control of its messages.
“I think the Fed is done raising rates, but I don't think that validates what markets expect about rate cuts next year,” El-Erian told Bloomberg Radio.
2024 will therefore be another crucial year for the world economy and central banks can still impress with their monetary policy.

Author: Hermes A.I.

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