Pimco: ECB Preview

Pimco: ECB Preview

July 16, 2024

ECB
ECB Europees Centrale Bank.jpg

By Konstantin Veit, Portfolio Manager at Pimco

We expect the July meeting to be an uneventful one, and expect the Governing Council (GC) to keep policy rates unchanged at 3.75% on the deposit facility.

According to President Lagarde, the strong labour market means that the ECB can take time to gather new information. As a result, the ECB is in no rush to cut rates further, decisions will remain meeting-by-meeting, and the data flow over the coming months will decide the speed at which the ECB removes additional restrictiveness.

Given the ECB’s reaction function, with decisions based on the inflation outlook, underlying inflation dynamics and policy transmission, we envision the ECB to continue cutting rates at staff projection meetings, and expect the next rate cut in September.

The market is currently pricing another 45 basis points of rate cuts for this year. The current terminal rate of around 2.5%, above most estimates for a neutral policy rate for the Euro area, speaks to elevated last mile inflation concerns.

Overall, market pricing seems reasonable and is currently broadly in line with our long-held baseline of three cuts for this year.

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