Isabel Schnabel, a member of the European Central Bank's board, recently discussed the potential for interest-rate cuts in an interview published this week. Although she did not explicitly confirm the cuts, her comments have strengthened market expectations in favor of such actions.
Market Odds Increase
According to market odds, the probability of an interest rate cut by the ECB next year has risen to 69% in March and 90% in April. This shift in expectations has already had a tangible impact as the yield on the 2-year German bund reached its lowest level since May, currently standing at 2.63%.
Outlook on Hikes and Cuts
During the interview with Reuters, Schnabel expressed doubts about the likelihood of another interest rate hike in the near future. While she did not explicitly mention rate cuts, her statements hinted at the possibility of such measures being taken.
In November, inflation in the Eurozone dropped to a year-over-year rate of 2.4%. However, experts anticipate that this figure will rise again due to various factors, including Germany's plan to start paying household energy bills in December 2022.
Schnabel expressed pleasant surprise at the November inflation figures, particularly with regards to underlying inflation, which is decreasing at a faster rate than anticipated. She described these developments as encouraging.
Taking a Prudent Approach
Despite market expectations, Schnabel did not fully endorse the likelihood of a rate cut next year. She cautioned against prematurely declaring victory over inflation and highlighted the need to monitor underlying inflation, wage growth, productivity, and unit profits.
Expert Predicts Rate Cuts
Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, believes that the stage is set for rate cuts. He expects such actions to be taken by June.