MFS: No change in the pace of cutting before early 2025

September 12, 2024

Interest Rates

Annalisa Piazza, Fixed Income expert at MFS, comments on today's ECB interest rate decision:

The ECB cut interest rates by 25bp at today’s meeting, with no major surprises on the communication on future steps. There is no willingness to signaling that the time for accelerating the policy normalization has arrived (yet) as tensions within the Governing Council probably remain very high, with the hawks still worried about pass-through of past high wages on inflation expectations. As such, data dependency is re-affirmed.

The ECB reiterated inflation will mechanically move higher in Q4 and so will negotiated wages so we can still see a December cut with some of these variables optically moving in the ‘wrong’ directions. We are indeed expecting the next cut in December. The bar for an October cut is currently high as there will not be enough data to justify a back-to-back move.

During the press conference, Lagarde broadly stuck to the script and she clearly didn’t want to show any major shift in the ECB mindset. The collective view of the Governing Council is probably still skewed to a degree of caution as indications coming from some inflation components are still not fully satisfactory. We expect it will take a few months of data to confirm tentative signs of moderation across the majority of inflation variables become the trend. As such, we don’t expect any change in the pace of cutting before early 2025.

From a market perspective, the curve is already pricing in slightly less than 150bp cuts in 12-month time, which is broadly in line with our projections. The recent steepening in the EGBs curves might take a ‘breath’ in the next 3 months or so but we suspect markets will be very sensitive to future comments by the ECB GC members as it is quite possible there is a wide range of views on the next steps, given the overall weaker economic picture.