ECB Ahead of Interest Rate Cut... "Could Drop to 'Emergency Level' if Trump Trade War Occurs"

Rate Cut Expected on the 12th
PIMCO "Market Optimistic... Downside Risks Larger"

The European Central Bank (ECB) is widely expected to implement its fourth interest rate cut of the year on the 12th (local time), with the market closely watching the future interest rate path. There are forecasts that if a trade war breaks out following the return of President-elect Donald Trump to the White House, Eurozone interest rates could fall to 'emergency levels.'

The market expects the ECB to lower the key policy deposit rate by 0.25% to 3% this month. However, major foreign media reported that the swap market is pricing in the possibility of a rate cut 0.25 percentage points larger than this.

[Image source=EPA Yonhap News]

According to LSEG, investors expect five more 0.25 percentage point rate cuts next year. If this happens, the deposit rate will fall to 1.75%.

The ECB raised rates to 4.5% last September due to COVID-19 inflation, then began cutting rates from June this year. The current benchmark rate is 3.4%, and the deposit rate is 3.25%. Major foreign media expect the market to abandon the previous view that the ECB will maintain sufficiently restrictive monetary policy to achieve price stability.

Jens Eisenschmidt, an economist at Morgan Stanley, said, "Growth risks are pointing downward," and "there will likely be discussions about the merits of a larger rate cut."

In particular, President-elect Trump's tariff policy is expected to be a major variable in the future interest rate path.

Andrew Balls, Chief Investment Officer (CIO) of PIMCO Global Fixed Income, warned that Eurozone interest rates could fall back to 'emergency levels' due to the impact of a trade war initiated by President-elect Trump. He said, "If trade goes to the worst-case scenario, the Eurozone will be in serious trouble," adding, "I think we are pricing in a positive outcome."

CIO Balls said, "If a worse-than-expected situation arises where the ECB has to apply a more urgent level of policy rates, I think it is easy to expect a lower terminal policy rate," and "As a result, the euro will depreciate further against the dollar." Since the end of September, the euro exchange rate has been fluctuating around $1.06 per euro. He also added, "I think the market is generally pricing in an optimistic outcome," and "While there are upside risks, downside risks are easier to identify."

Meanwhile, ahead of the ECB, Australia is set to decide on interest rates on the 10th, and Canada on the 11th. Bloomberg reported that Australia is likely to maintain rates, but Canada may implement a cut of up to 0.5% due to concerns over a US-led trade war.

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