Aegon AM: The ECB in pole position

16 oktober 2024

Rente ECB

The monetary easing season has officially started in global rates markets. The major central banks responsible for around 90% of reserve currencies have decreased their key borrowing rates at least once in the last few months.

With economic growth synchronized in most regions due to global trade flows and interconnected capital markets, central banks tend to follow each other in policy changes. While the US Fed is usually seen as a leading central bank, the current easing cycle is marked by the ECB pioneering monetary policy action.

Usually, when the global economy is under weather, the US Fed is racing to be on the frontlines to start the interest rate-cutting cycle. Given the dominance of the US economy and the size of its financial market, this indeed proves to be an important stimulus for other markets and an important sentiment driver in different asset classes.

This time around, the Fed was not the first major central bank to kick off the cutting season. The ECB, which is usually seen as a more cautious follower, cut rates in June by 25bps, while the Fed started easing only in September. The underlying strength of the US economy and higher inflation numbers kept the Fed on hold, while the outlook for the European economy started to lose steam and inflation pressures were waning away.

The new cutting cycle is remarkable because central banks are starting from a very high level, comparable to where rates were before the Financial Crisis of 2007. It may give policymakers more room for deeper cuts if necessary, but it will also add more uncertainty to the rates market by introducing more volatility around pricing the terminal rate.

Due to the lags in monetary policy impact on the real economy, we cannot know in advance if central bankers are making the right call in rate changes. However, the ECB seemed to make a reasonable step by starting their cutting cycle in June and not waiting for the Fed.

Despite some components of inflation being still somewhat sticky, the price pressures continued to ease and restrictive rates continued to dampen economic activities in Europe. The Fed had to follow the pack with 50bps cut in September, which seems to be a catch-up move that sent a confusing signal to the market. The ECB, on the other hand, made another 25bps decrease in rates in September and managed to communicate its reaction function more clearly.