ECB reportedly starting to debate whether rates need to go below neutral in latest cycle

The report says that ECB policymakers have already begun debating at what level do interest rates need to go in order to start stimulating the economy. The sources did say that any consensus is still a long way off though but it marks a significant turning point in the latest cycle, which could see the ECB cut rates sooner and by more than expected.

The change in thinking comes as the economic outlook is struggling and inflation continuing to hold lower than earlier predictions.

One source said that “I think neutral is not enough”, suggesting that the ECB may look to lower rates by much more in the months ahead. The only key piece of uncertainty though I would say, is that there is no set idea of where this neutral rate is supposed to be. Not even the ECB knows that themselves, at least for now.

In any case, there is definitely some dovish undertones being echoed in the report here.

As thing stand, traders have fully priced in a 25 bps rate cut for December. The odds of a 50 bps rate cut are at ~23% currently. Looking to June next year, there is ~115 bps of rate cuts priced in with five meetings between now and then.

This article was written by Justin Low at www.forexlive.com.