ECB Dismisses Rate Cut, but Market Expects It to Follow Fed

Mayor Seon "Tightening to End Soon"
Likely to Follow US Rate Cut Forecast

On the 14th, the European Central Bank (ECB) dismissed the possibility of future interest rate cuts at its monetary policy meeting, but the market has not abandoned expectations that the ECB will soon end its tightening cycle. It is judged that it will be difficult for the ECB to take an independent path as the U.S. Federal Reserve (Fed) has signaled interest rate cuts.

On the 14th (local time), Bloomberg reported that the market expects the Fed to start cutting rates in March next year, and the ECB in April.

The expected rate cut in the market is 1.5 percentage points. Bloomberg reported that market participants expect the ECB and the Bank of England (BOE) to cut rates over six quarters (0.25 percentage points each) and four quarters respectively starting next year. Global financial group ING also stated that the money market is pricing in a rate cut of up to 1.5 percentage points for the Eurozone in the future.

Experts predict that if the U.S. starts cutting rates, it will be difficult for the ECB to maintain a high interest rate stance independently. If the U.S. pivot causes the dollar value to decline and the euro strengthens relatively, the global export competitiveness of Eurozone countries could weaken. Major foreign media forecast, "If the Fed begins cutting rates, the euro's value will be lifted, leading to a deterioration in the trade balance of member countries."

Concerns about a recession if high interest rates are maintained cannot be overlooked. The Eurozone's gross domestic product (GDP) growth rate is projected to be 0.6% this year and 0.8% next year, but experts have differing views. A Bloomberg survey conducted earlier this month among analysts showed that the majority expect the Eurozone to record a 0.1% quarter-on-quarter contraction in the fourth quarter of this year. If this quarter's growth rate is confirmed as expected, the Eurozone will enter a technical recession phase with two consecutive quarters of economic contraction.

Germany and France, the two pillars leading the European economy, are already showing clear signs of recession. Germany's manufacturing industry has significantly contracted, followed by an unprecedented budget gap due to fiscal soundness issues. France has also seen a significant contraction in corporate activity. Lee Hardman, a foreign exchange analyst at Mitsubishi UFJ Bank, explained, "The longer the ECB maintains a high interest rate stance, the greater the likelihood that the Eurozone economy will fall to the bottom," adding, "For this reason, market participants are skeptical about whether the ECB can maintain a hawkish stance for a long time."

On the other hand, some argue that unlike the Fed, which pays attention to both inflation and employment, the ECB focuses solely on controlling inflation, making the possibility of rate cuts low. Dirk Schumacher of French investment bank Natixis said, "The Fed is sensitive to whether U.S. economic growth slows, whereas the ECB is focused on price stability," adding, "The ECB has more flexibility in monetary policy compared to the Fed, so it is unlikely to follow the Fed in cutting rates."

Meanwhile, earlier on the same day, ECB President Christine Lagarde dismissed the possibility of ending tightening at a press conference following the monetary policy meeting, saying, "We did not discuss any rate cuts at all." She warned, "Inflation has fallen over the past two months to 2.4% year-on-year in November," but cautioned that it has not yet reached the ECB's inflation target of 2%, so it is not time to lower vigilance.

This content was produced with the assistance of AI translation services.