Eurozone bond yields continued to rise, while money markets became less confident that the ECB would cut rates at its April meeting. Markets were pricing in a 48% chance of a first 25 basis points ECB rate cut in April, after pricing it in fully at the end of January. In addition, ECB euro-short-term rate forwards priced in 115 basis points of rate cuts by year-end, from around 120 basis points yesterday and 140 basis points last week.
The reassessment of the monetary policy prospects is caused by a new batch of data, as well as statements by ECB policymakers that the Central Bank still needs more evidence that inflation is returning to the 2% target before the cycle of interest rate cuts begins. Meanwhile, ECB hawk Robert Holzmann warned yesterday that "there is a certain probability that ECB will not ease monetary policy this year or will do so only at the very end of the year."
Citi suggested the cut-off for the ECB economic projections may have been Wednesday, and that wage figures, which are crucial for a possible central bank decision on rates, will be missing.
Inflation in the eurozone is expected to ease further over the course of 2024 as the effects of past energy shocks, supply bottlenecks and the post-pandemic reopening of the economy fade, and tighter monetary policy continues to weigh on demand. The latest Survey of Professional Forecasters (SPF) showed that respondents revised down their expectations for headline inflation as measured in terms of the Harmonised Index of Consumer Prices (HICP). Headline HICP inflation was expected to decline from 2.4% in 2024 to 2.0% in both 2025 and 2026. Expectations for 2024 were revised down by 0.3% and those for 2025 by 0.1%. The downward revisions reportedly reflected the impact of lower than previously expected HICP data outturns and oil prices as well as weaker economic activity.