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European stocks and bonds fell after European Central Bank President Christine Lagarde cited the summer as a likely time for a rate cut, but bounced back on expectations for a rate cut in March.
The region-wide Stoxx Europe 600 index fell 1.2% shortly after Lagarde said market expectations for an ECB rate cut this spring were “not helping” in the fight against inflation.
His comments came as London’s FTSE 100 index fell 1.6% after British inflation unexpectedly rose to 4% in December and traders scaled back bets on a Bank of England rate cut. It was announced in
Before Lagarde’s speech, markets were fully pricing in the ECB’s record 4% cut in benchmark interest rates by April, with a 30% chance of a March cut.
After his remarks, the probability of a reduction by April dropped to 95% and a reduction in March to 20%.
Asked if she agreed with other ECB Governing Council members who have suggested that a rate cut is expected this summer, Lagarde said: “I would say it is likely, but I also have reservations.” No,” he said.
He told Bloomberg TV at the World Economic Forum that the ECB would have the information it needs on wage pressures by “late spring.” Such data will be needed before decisions are made to lower borrowing costs.
“Expectations for early interest rate cuts by global central banks seem to have been a bit optimistic,” said Charles Hepworth, investment director at GAM Investments.
Rate-sensitive real estate groups performed the worst, as European stock markets reacted slower than previously expected to the prospect of rate cuts. France’s Cac 40 fell 1.1% and Germany’s Dax fell 1%.
Bond markets were also hit by a sell-off, with the UK 10-year bond yield, which moves inversely to prices, rising 0.07 percentage point to 3.87%.
Matthew Landon, global market strategist at JPMorgan Private Bank, warned that Wednesday’s UK inflation data will almost certainly delay the Bank of England’s policy change. [BoE] I’m sure I’ll be able to do it this year. ”
Germany’s interest rate-sensitive two-year bond yield rose 0.04 percentage point to 2.63% on Wednesday, its highest level since early December.
Federal Reserve Board member Christopher Waller said on Tuesday that policymakers should “take their time and get it right,” after warning against rushing to cut interest rates. Government bond prices were already taking a hit.
Speaking the day before the ECB began its quiet period ahead of its next Governing Council meeting (25 January), Ms Lagarde said that inflation in the euro area would fall sustainably to the ECB’s 2% target in the medium term. He said there is growing confidence that Annual price growth in the region slowed from a peak of 10.6% in October 2022 to 2.9% last month.
However, the ECB President said that inflation in the labor-intensive services sector remained too high (4% in December) and there was a risk of higher wage growth, which meant that wages per euro area employee last year It rose 5.2% and warned that prices were holding steady. Pressure is too high.
He said interest rates had “peaked before any further major shocks occurred.” “But to ensure that inflation continues to fall, we must continue to restrict it for as long as necessary.” “The danger is to go too fast.” [on rate cuts] And I have to come back and do more. [rate increases]”
His comments were backed up by Klaas Knott, president of the Dutch central bank and member of the ECB rate-setting board, who told CNBC on Wednesday: The more you cut rates, the less likely you are to raise them again. ”
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