Global Fixed Income Strategy - October 2024
Is Europe’s neutral rate rising?
The US labour market has dominated headlines in recent months, but a significant shift in the eurozone deserves attention. Over the past year, the European Central Bank (ECB) has started to remove policy restriction, navigating signs of disinflation while grappling with, what now appears to be, exaggerated fears of a wage-price spiral. Thus far, growth has remained resilient, allowing the ECB to adopt a cautious approach to cutting interest rates. However, recent data suggest a downward trend in growth, with indicators pointing to likely below-potential performance in the second half of 2024. Simultaneously, inflation metrics have disappointed, further diminishing concerns about a wage-price spiral. In light of these developments, it seems prudent for the ECB to accelerate its policy adjustments. We now anticipate a 25-basis point cut at each meeting until it reaches a “neutral” stance. Given the ECB’s inflation-focused mandate, we believe it is unlikely to implement more aggressive 50-basis point cuts.
