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The ECB is really done raising rates, here's why

ECB: the rate hike could really be over according to the statements of Eurotower member Isabel Schnabel.
The official, known as one of the European Central Bank's most hawkish voices, said inflation was showing a "noticeable" slowdown, a U-turn that is pushing markets to increase bets on an interest rate cut already in March.
Schnabel, who just a month ago insisted that rate hikes should remain an option because the "last mile" of the fight against inflation could be the toughest, said he changed his position after three inflation data consecutive unexpectedly favorable ones.
The markets, which were already discounting the decrease in the cost of money starting from the spring, now have one more element to bet on an accommodating ECB.
The wait is all for the meeting on December 14th, when the projections on inflation and GDP will also be updated from Frankfurt.
read also Why are the markets "against" the Fed and the ECB? ECB rates, stop increases: what Schnabel said The European Central Bank can rule out further interest rate increases given the significant drop in inflation and policy makers should not maintain a high and stable level of the cost of money until mid-2024 , said Isabel Schnabel, a member of the ECB board in an interview with Reuters.
The reference is to the latest data on consumer prices, which fell to 2.4% last month, from over 10% the previous year, after a record series of rate increases.
The 2% inflation target is now closer and policymakers' warnings that there could be another two years of persistent price growth seem unlikely.
“The November flash release was a very pleasant surprise,” Schnabel reported.
“Most importantly, underlying inflation, which has proven more tenacious, is now falling faster than we expected…Overall, inflation developments have been encouraging.” While effectively ruling out another rate increase, the official maintained a more cautious approach regarding the prospect of a rate cut on which traders are betting.
“We have to see what happens,” he said.
“We have been surprised many times in both directions.
So, we should be careful about making statements about something that will happen in six months.” Schnabel is the first of the ECB's political hawks to signal a change in perspective.
His comments come after Bundesbank chief Joachim Nagel said November data had not changed his mind and that a rate hike was still a possibility.
read also Watch out for the next ECB move (not about rates) ECB, rates and forecasts for the Eurozone: what to expect? Rates are expected to remain unchanged for the second time when the ECB meets on December 13 and 14.
Also in focus will be new economic forecasts that will extend to 2026 for the first time.
UBS economists led by Reinhard Cluse said in a note Monday that the ECB will likely have to lower its growth and inflation outlook in 2023 and in 2024.
Markets, meanwhile, are pricing in more than five cuts to the 4% deposit rate, the first of which will take place as early as March.
However, the fight against prices has not yet been won according to Schnabel and further progress on underlying inflation and slower wage growth is needed to be out of danger.
The ECB is also waiting for data to see whether companies' profit margins will continue to shrink.
“We must not prematurely declare victory over inflation,” he said.
“We are on the right track, but we must remain vigilant.” Schnabel also said weak growth resulting from ECB rate hikes was helping fight inflation, but that a deep or prolonged recession was unlikely, with recent data supporting expectations of a recovery.
read also Europe, what is happening with such high rates? An answer in a graph In this rather uncertain context, the European Central Bank may indeed have finished raising interest rates.
In fact, the demand for loans, the surge in mortgage repayments, the stagnation and the danger of stagflation have also come under observation.
Due to all these factors, the ECB will probably begin to study a less aggressive strategy for its next decisions.

Author: A.W.M.

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