Traders See 20% Chance of Half-Point ECB Rate Cut in December

(Bloomberg) — Traders are adding to bets that the European Central Bank will need a bumper interest-rate cut in December after policymakers flagged risks to growth as they lowered borrowing costs on Thursday.

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Money markets imply a 20% chance of a half-point cut at the final meeting of the year and are almost fully priced for quarter-point reductions at every ECB meeting through April. Before the decision, traders were only expecting a quarter-point cut in December and consecutive moves through March.

The shift toward the outlook for more aggressive easing came after policymakers led by President Christine Lagarde cut rates for a second straight meeting in response to a weakening economy. The key deposit rate was lowered by a quarter-point to 3.25% — as predicted by all analysts in a Bloomberg survey.

Just weeks ago, a cut at Thursday’s meeting wasn’t even on the table, yet the decision was unanimous, something traders took as a sign that policymakers may support a larger cut at coming confabs.

“This should remove the tail risk of a larger group of hawkish dissenters in the future,” Frederik Ducrozet, head of macroeconomic research at Banque Pictet & Cie SA, wrote in a client note.

The ECB said the process of taming prices should be complete “in the course of next year” — tweaking its previous language for that landmark to only be reached in the second half of 2025. Officials, however, didn’t specify when or how quickly borrowing costs will be reduced from here.

“I think a 20% chance of a 50bps cut is a bit of a stretch at the moment, but the lack of guidance from the ECB also suggests that they could go that way if they would find that appropriate,” said Evelyne Gomez-Liechti, a strategist at Mizuho International Plc.

The ECB’s move to lower interest rates for the third time this year follows a string of weaker economic data and a slump in inflation to below the central bank’s 2% target. For traders, that scenario will lead policymakers to bring the deposit rate below 2% by the end of next year.

“If we truly believe their data dependency commitment, then the pricing of future cuts has to be a reflection of the market’s view that data is to continue deteriorating,” said Gareth Hill, fund manager at Royal London Asset Management.