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: ‘The pivot is in.’ Key ECB official doesn’t rule out interest-rate cuts next year

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Isabel Schnabel, a European Central Bank board member, declined to rule out interest-rate cuts next year in an interview published Tuesday.

Her remarks helped to further cement market odds the ECB will cut rates next year, to 69% in March and 90% in April.

The yield on the 2-year German bund
BX:TMBMKDE-02Y
fell to 2.63%, the lowest level since May.

In the interview with Reuters whose transcript was posted on the ECB site, Schnabel called the prospect of another hike “rather unlikely” though she didn’t outright say cuts were coming.

Inflation in the eurozone fell in November to a year-over-year rate of 2.4% in November, but that number is expected to pick up again due to factors including Germany starting to pay household energy bills in Dec. 2022.

“The November flash release was a very pleasant surprise. Most importantly, underlying inflation, which has proven more stubborn, is now also falling more quickly than we had expected. This is quite remarkable. All in all, inflation developments have been encouraging,” she said.

Schnabel didn’t outright endorse market expectations for a cut next year, saying central bankers can’t “declare victory over inflation prematurely.”

“There’s first likely going to be an uptick in inflation. So, this downward movement of inflation is probably not going to continue for now. And most importantly, we need to see what’s going to happen to underlying inflation, to wage growth, to productivity, to unit profits,” she said.

Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, said “the pivot is in” as he expects rate cuts by June.

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