“Declining price pressures are leading central banks such as the ECB to reduce policy rates. This, coupled with uncertainty over economic growth, could potentially be supportive for European bonds.”
- The ECB cut its benchmark interest rates in the context of falling inflation and weak economic growth.
- We expect the bank to continue on this rate cut path, but it would actively monitor actual incoming data.
- This backdrop calls for a strategically positive stance on government bonds for instance in Europe.
The European Central Bank (ECB) reduced interest rates by 25 bps in its latest policy meeting in September. This is the second time the bank eased rates this year, in an affirmation of falling price pressures. We believe easing wage growth and progress on inflation are allowing the central bank to continue on this path. While we expect two more rate cuts this year, we think the bank is likely to remain data dependent and vigilant on components such as services. Falling oil prices and a strengthening euro (that makes imports from outside the region cheaper) should further help the ECB in dealing with inflation. Looking ahead, the central bank could consider any deceleration in economic activity along with inflation data, before taking policy decisions.
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