PGIM Fixed Income: Preview of ECB interest rate decision

PGIM Fixed Income: Preview of ECB interest rate decision

7 december 2023

ECB
europese centrale bank (ECB).png

Katharine Neiss, Chief European Economist of PGIM Fixed Income, comments on the ECB's upcoming interest rate decision.

Against a backdrop of weakening activity and fast-declining inflation, markets are getting behind the idea of early and substantial rate cuts in 2024. This pattern has been particularly striking for ECB policy rate expectations.

The November flash estimate for euro area inflation was surprisingly weak, including underlying measures of domestically generated inflation such as core and services inflation. At this stage we do not have the breakdown of the drivers behind for example the weak services inflation, but we doubt this is sufficient evidence for the ECB to pivot towards cutting rates so soon.

That said, if the final inflation release – expected after the ECB’s next meeting – shows a broad based weakening, and comes alongside other high frequency indicators suggesting that the labour market in particular is cooling rapidly, then early and aggressive cuts could be in the frame.

Our base case however is that the euro area economy will largely move sideways, that the labour market will soften but remain broadly resilient, and that infrastructure spending will support the European periphery. That view points to an adjustment to peak rate in the latter part of 2024, such that the policy rate ends 2024 at 3.5%.

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