Expectation Of Interest Rate Cut From European Central Bank

Expectation Of Interest Rate Cut From European Central Bank

As Corona virus concerns shook the markets, investors' expectations for interest rate cuts from the European Central Bank increased.  While investors price the European Central Bank (ECB) to cut the interest rates more recently; this expectation reflects growing concerns that the corona virus will spread and severely affect the Euro Area economy. Officials announced that the fourth person infected with corona virus died in Italy. With new cases increasing in South Korea, Iran, and Italy, concerns have grown that the corona virus in China will turn into an epidemic. Investors began to give more opportunities for ECB to cut interest rates in the near term. Eonia money market futures contracts are pricing at the ECB meeting in July 2020 to cut interest rates by 5 basis points. This means that the interest rate cut is about a 50 percent probability. The interest rate cut was given a 35 percent chance last week. US federal fund futures have signalled more interest rate cuts this year, while giving a 20 per cent chance of an interest rate cut next month. While the schools, universities, museums and cinemas were closed in the region, which is the third biggest economy of the Euro Zone, the region most affected by the virus; analysts said the rate cut may not be enough to support economic growth. Analysts, however, have expressed concern that an interest rate cut is one of the best options in the current situation, as the ECB is running out of tools at its disposal. "There are many arguments as to why the ECB's lowering interest rates from current levels will not do much to stimulate the economy," said John Davies, Standard Chartered G10 interest strategist in London. Davies "reality is that central bank policymakers can't be seen as doing anything. Could the ECB lower interest rates or take further monetary easing steps, but do more monetary easing without changing the current parameters? In this case, interest rate cuts become the easy way," he said. In September 2019, the ECB announced new measures to support the Eurozone economy that had lost momentum, lowering interest rates and resuming bond purchases. Concerns about the negative effects of sub-zero interest rates have also increased in recent months. Against this backdrop, money markets are not pricing in drastic easing steps from the ECB, with EONIA futures contracts offering a 10 basis point interest rate cut of about 70 per cent by the end of the year.