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Deutsche Bank now sees first ECB rate cut in April

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Earlier in the day, the ECB’s Kazimir said market bets on a first-quarter rate cut were “science fiction.” Deutsche Bank disagrees.

In a preview of next week’s ECB decision, the German bank has changed its view and now sees:

  • 150 basis points of ECB rate cut in 2024 compared to 100 basis points previously
  • The first cut will take place in April and it will be 50 basis points, then another 50 basis points in June. Previous call was 25 basis points in June
  • “A significant risk” of reduction in March

As for next week, DEB economists predict that the ECB will acknowledge the faster-than-expected decline in inflation, but will be cautious about declaring victory over inflation too soon. Lagarde will emphasize the data-dependent nature of her policy, indicating that the duration of restrictive rates will depend on economic data.

“At the upcoming press conference on December 14, we hope that the ECB will acknowledge that inflation has fallen faster than expected, but will be reluctant to prematurely declare victory,” the report said.

Another lever the ECB could use is the Pandemic Emergency Purchase Program. There could be an early exit from PEPP reinvestments, with a baseline expectation of an announcement in March 2024 and a gradual exit from the third quarter of 2024.

The main thing to watch will be the ECB’s new forecasts, which will undoubtedly show a quicker return to 2% inflation.

Regarding foreign exchange, “it now appears that the ECB will ease its measures before the Fed” and they say that a weaker euro would not constitute an obstacle to reductions.

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