Traders’ Confidence Grows in ECB Rate Cuts

By Yoruk Bahceli and Samuel Indyk

LONDON (Reuters) – Traders expressed increased confidence on Thursday that the European Central Bank (ECB) would implement three additional rate cuts this year. Weak growth data, combined with the bank’s latest rate reduction, underscored the necessity for further easing.

The ECB cut rates by 25 basis points (bps) to 2.75%, as anticipated, while keeping the possibility of further policy adjustments open. This decision contributed to a decline in two-year German bond yields, now at three-week lows around 2.18%.

This decision followed disappointing data showing the eurozone economy unexpectedly stagnated last quarter, missing expectations for a 0.1% expansion, with two consecutive years of contraction in Germany negatively impacting the entire bloc.

Compounding this pessimism, U.S. President Donald Trump’s tariff threats loomed over an already sluggish eurozone economy. However, he has not yet implemented the blanket tariffs that were feared.

As a result, traders have grown more optimistic about the ECB delivering three additional rate cuts this year, currently anticipating around 70 bps of cuts by the end of the year, representing an over 80% chance of three cuts. Just last Friday, markets priced a 60% chance for the same.

“The ECB meeting was a tad dovish, with the mention of headwinds to growth, or at least it was not hawkish,” remarked Barclays’ head of euro rates strategy, Rohan Khanna, noting that Thursday’s growth data fell below ECB expectations.

European bond yields decreased broadly. Germany’s two-year yield, sensitive to rate expectations, was on track for its largest daily fall since late November, down approximately 8 bps in late trade.

Ten-year Bund yields fell by 6 bps to 2.52%, while Italy’s 10-year yields decreased to 3.58%, the lowest in a week.

The euro, typically impacted negatively by rising rate-cut expectations, rose 0.1% for the day as the dollar weakened amid disappointing U.S. growth data.

Europe’s STOXX 600 equity index increased by 0.8%, remaining relatively stable amidst growth data and the ECB’s decisions. An index of eurozone bank stocks, which had reached a high not seen since 2011, remained elevated.

Bleak Outlook

Given the grim outlook confronting the bloc, some analysts suggest that the ECB may need to cut rates below the anticipated 2% by year-end. A 2% deposit rate aligns with the eurozone’s neutral rate, which neither restricts nor stimulates growth.

“We expect developments regarding tariffs in the coming weeks. This will be a critical driver of ECB policy moving forward,” stated Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International, predicting that the ECB would lower rates to 1.5% by year-end, as worries regarding global trade tensions persist.

“But what happens after that… we still have to see,” he added.

A further ECB cut is anticipated in March with little opposition among policymakers, although discussions regarding additional easing might intensify, possibly leading to a pause in April, according to three sources who spoke to Reuters on Thursday.

Traders consider an April move as uncertain, presuming the ECB will cut rates in March.

The ECB’s recent move has also reinforced the policy divergence between the eurozone and the U.S., where the Federal Reserve maintained rates during Wednesday’s meeting, indicating no immediate need for further cuts.

Notably, the premium that 10-year U.S. Treasury yields provide over German peers—a reflection of differing economic outlooks between the two regions—rose back above 200 bps. This premium had dropped below that threshold for the first time since November earlier this week, as German bond yields increased in January while Treasury yields declined.

(This story has been corrected to fix the interest rate probability in paragraph 5)