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European stocks and bonds fell in early trading on Wednesday after European Central Bank president Christine Lagarde said the central bank was likely to cut interest rates in the summer — pushing back against hopes for rapid and aggressive cuts as early as March.
The region-wide Stoxx Europe 600 fell 1.2 per cent shortly after the opening bell, with rate-sensitive real estate groups among the worst performing stocks. France’s Cac 40 dropped 1.2 per cent, while Germany’s Dax slipped 1 per cent.
London’s FTSE 100 fell 1.4 per cent after UK inflation unexpectedly rose to 4 per cent in December, prompting traders to scale back their bets on interest rate cuts. UK 10-year bond yields climbed 0.1 percentage points to 3.90 per cent, reflecting a fall in prices.
Lagarde said policymakers should have enough wage data by “late spring” to decide if eurozone inflation will keep falling, adding that there was “a catch-up in wage bargaining taking place” and the ECB was waiting to see if this was strong enough to push up prices. “We should have information we can verify in the late spring,” she told Bloomberg TV at the World Economic Forum in Davos.
Asked if she agreed with fellow ECB governing council members who have signalled a rate cut is expected this summer, she said: “I would say it is likely too, but I have to be reserved.”
Markets are pricing in an ECB rate cut as early as April, but Lagarde said this was “not helping” the fight against inflation if it was too optimistic and this caused the cost of financing for households and businesses to fall prematurely.
Bond markets were already falling, sending their yields up, after US Federal Reserve board member Christopher Waller warned on Tuesday that it should not rush to slash rates, saying policymakers should “take our time to make sure we do this right”.
Germany’s rate-sensitive two-year bond yield rose 0.04 percentage points to 2.3 per cent on Wednesday, its highest since early December.
Speaking a day before the ECB’s quiet period starts ahead of its next meeting on January 25, Lagarde said she was increasingly confident that eurozone inflation would sustainably drop to the ECB’s 2 per cent target in the medium term. Annual price growth in the bloc has slowed from a peak of 10.6 per cent in October 2022 to 2.9 per cent last month.
But the ECB president warned inflation was still too high in the labour-intensive services sector — at 4 per cent in December — and there was a risk of high wage growth, which pushed up pay per eurozone employee 5.2 per cent last year, keeping price pressures too high.
“Short of another major shock we have reached a peak” in interest rates, she said. “But we have to stay restrictive for as long as necessary” to ensure inflation keeps falling. “The risk would be we go too fast [on rate cuts] and have to come back and do more [rate increases].”
Her comments were backed up by Klaas Knot, head of the Dutch central bank and a member of the ECB rate-setting governing council, who told CNBC on Wednesday: “The more easing the markets has already done for us, the less likely we will cut rates, the less likely we’ll add to it.”
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