Traders Price in an ECB Rate Cut as Economic Sentiment Crumbles

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Investors have gone from betting on a rate increase from the European Central Bank to a cut in just a matter of months.

Money-market traders are now pricing in a 10-basis point reduction in the benchmark deposit rate by July next year, a far cry from expectations for an increase seen at the start of 2019. The change in sentiment comes as risks from U.S.-China trade tensions to Italy’s fiscal deficit damp sentiment, sparking a global rally in bonds and spurring speculation that central banks will have to loosen policy to boost the global economy.

The ECB is due to announce its next rate decision and publish its economic forecasts Thursday.

“It makes sense for markets to prepare for a possible cut,” said Martin van Vliet, a strategist at Robeco. “With inflation expectations back at mid-2016 lows, I would not fade the discounted rate cuts going into tomorrow’s meeting.”

While traders expect more details on the ECB’s latest round of cheap bank loans, officials may need to signal they are considering stronger action, such as a new round of quantitative easing, if they are to maintain credibility in the eyes of some.

To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Scott Hamilton

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