ECB expected to cut interest rates next year

The European Central Bank (ECB) followed in the footsteps of the Federal Reserve (FED) and began to tighten monetary policy. Traders believe that after the European Central Bank has raised interest rates aggressively, it may tighten too much, and it is expected to cut interest rates backhand later next year.

In early September, the European Central Bank announced a 0.75% increase in the deposit rate, Reuters reported. The European Central Bank adopts a "front-loading" monetary tightening policy to combat deflation, which means that at the beginning of the tightening cycle, the rate of interest rate hikes is large, and then gradually slows down. Officials signaled that even if the eurozone faces a recession, it will continue to raise interest rates until early 2023.

According to data provided by Refinitiv to ICAP, after the ECB meeting in September, the money market raised its forecast for rate hikes, predicting that the ECB will raise interest rates by 70 basis points (0.7%) at both the October and December meetings. Traders estimate that rates will peak in 2023 at 2.7%.

While the market expects the European Central Bank to raise interest rates more aggressively, it is also betting that interest rate cuts will start later this year. They speculate that rates will drop to 2.6% in February 2024. Nomura, BofA, and Allianz all estimate that the ECB will cut rates in 2023 or 2024.