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Rates: what do investment banks expect the ECB to do now?

Rates: what do investment banks expect the ECB to do now?

He European Central Bank (ECB) cut the interest rate in the eurozone by a quarter point to 4.25% but at the same time raised its inflation forecasts for this and next year and did not commit to continuing to cut the rate in the next meetings. What do the large investment banks and international managers expect now after the decline considered “hawkish” (contractionary bias) by the market?

For example, the management experts PIMCO They expect him to continue cutting the rate in the meetings in which he evaluates the projections and September offers the next opportunity to globally reassess the disinflation process. They explain that unlike what happened at the beginning of the year, market prices seem reasonable and generally adjust to the base scenario of three cuts in 2024.

“Risks lean in favor of fewer cuts, mainly due to the rigidity of services inflation, the resilience of the labor market, the relaxation of financial conditions and the risk management considerations of the ECB,” they point out after The market expects a cut at the July meeting.

For his part, the Bank of America predicts that there will be two more cuts in 2024 (September and December) and five more in 2025. “Inflation below the target will end up pushing (giving a sense of urgency) the ECB to accelerate the cycle of cuts more than they currently expect,” maintains the BofA. While analysts at the Japanese bank Nomura align with these projections and maintain their opinion that the ECB will cut twice more this year and three times next.

The analysts of RaboBank They maintain that the next data will still have to confirm the ECB’s assumptions, therefore, they expect that the next cuts will be gradual and the next one will probably be in September.

The people of Citi expects something similar noting that given the expectation that headline inflation will now quickly fall to 2%, they still see another cut in September after a pause in July as a solid base case. The one who also reduced his estimate of an additional cut in July was Julius Baer in the face of a more gradual easing of monetary policy and now estimates that this cut will occur in September.

With some nuances, but along those same lines, the analysts of Jefferies They expect the next cut to be in September, but that possible cut will depend on what the Fed does. “If we find ourselves in a scenario in which the Fed does not cut anything this year, we believe that the next cut by the ECB will probably be in December “, they warn. In this regard, the people at Danske Bank point out that they are still waiting for the next cut in December although they do not rule out one possibly in September.

For their part, the experts of Fidelity International They highlight that the ECB refrained from committing in advance to future cuts and maintained a data-dependent stance. They explain that a cut in July seems clearly ruled out and the trajectory of the ECB rate will depend on the evolution of the data from now on and the Fed, which they believe will not be able to cut this year, given the rigidity of US inflation.

From the BlackRock Investment Institute They say they don’t think the ECB will cut much and fast, so investors should keep the bigger picture in mind, as rates in the eurozone will likely remain structurally higher than before the pandemic.

While from the manager abrdn point out that the ECB will have little additional data before its July meeting, in particular on wage growth in the second quarter, therefore consider the reiteration of the emphasis on data dependence to be consistent with the forecast that the rate will remain the same in July.

For strategists T. Rowe Price The ECB will end up applying two more cuts this year. They explain that while there is room for new surprises in the short term, markets should not expect any future guidance, because all future cuts in 2024 will likely be hardline as they will not include any type of guidance. Of course, they warn that this purely data-driven approach also means the ECB could easily cut less than twice, with one more cut perhaps only seen towards the end of the year if inflation remains much more persistent than expected.

From Mirabaud Asset Management They assess the cut as aggressive since no clear guidance has been given on future measures, but they continue to expect two more cuts this year.

Finally, those who seem to distance themselves from the consensus are the strategists of Schroders who are optimistic and expect three more cuts this year and two the next. They explain that the ECB has a lot of room to surprise cautious investors and this suggests a certain rebound, both for European fixed income markets – lower yields mean higher prices – and for equity markets.

Source: Ambito

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