Framing the ECB’s rate cutting cycle
- 26 February 2024 (10 min read)
Key points:
- Market pricing was a poor predictor of actual ECB decisions in the last interest rate hiking cycle. Detailed analysis suggests market expectations more than two to three weeks before an ECB meeting should be viewed with great caution
- The Orphanides-Wieland rule suggests some upside to our – and the market’s – baseline of a 25-basis-point (bp) ECB rate cut in June. Further out, the Taylor rule highlights that rates could fall by more than the 125bp we predict by end-2025
- We believe it is worth stepping back from these well-known, yet simple, policy rate rules. The ECB is likely to maintain a more holistic approach, including risk management
- A cautious approach to using these rules is paramount, reinforced by two key uncertainties – the Eurozone faces multiple large (negative) supply structural changes, which may imply higher price pressures than in the past. Second, fiscal policy in the context of the new Eurozone framework may also be more inflationary than in the past
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