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Financial markets in ‘no man’s land’ as they await rate moves

Middle-ground speculation is for ECB rate cuts to begin in June

President of the European Central Bank Christine Lagarde spurred speculation of early rate cut. Photograph: Kirill Kudryavtsev/AFP via Getty Images

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Tue Feb 13 2024 - 05:32

With the European Central Bank (ECB), the Federal Reserve in the US and the Bank of England “firmly in pause territory, any monetary policy jawboning from them is currently having little or no impact”, a senior market commentator said.

“FX markets seem to be sitting in no man’s land at the moment,” he said, noting euro/sterling implied volatility metrics were sitting at over 16-year lows.

US inflation data for January is due out on Tuesday followed by UK inflation data on Wednesday. They will provide more data points, triggering presumably more speculation but the sense is that central banks, whenever the down cycle starts, will proceed cautiously.

The middle-ground speculation is for ECB rate cuts to begin in June and for Frankfurt to cut rates three times this year.

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“As regards ECB policy, we expect policy rate cuts to begin in June, proceeding more slowly this year (75 basis-points) but faster in ‘25 (100bps) than priced in as inflation persistence fears are gradually dispelled,” Investec said in a recent note.

“The better news is that inflation has eased faster than the ECB had expected and that the jobs market is still robust. Provided both factors remain in place, rising real incomes should lay the groundwork for faster growth later in ‘24 and into ‘25, reinforced in due course by rate cuts incentivising more investment,” it said.

ECB supremo Christine Lagarde spurred speculation of early rate cuts, possibly in April, signalling last month that wage growth was showing signs of cooling.

Policymakers have from the start feared the inflationary surge could be prolonged by workers demanding higher pay to compensate for the erosion in real wages.

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