ECB officials facing quandary as markets bet on early rate cut

Dilemma faced by policymakers evokes December 2021, when they dragged their feet as the US Federal Reserve enacted a hawkish pivot and investors began betting on ECB rate increases

ECB president Christine Lagarde weighs the risks of cutting too soon and letting inflation run rampant, or crashing the economy with too much constriction. Picture: Michael Probst/PA

The European Central Bank’s forecasts and any accompanying messaging are about to take prominence as president Christine Lagarde weighs how far to push against market wagers on interest-rate cuts.

With rapidly-weakening inflation, a feeble economy, and one hawkish policymaker changing tack, traders are heaping bets on a reduction as soon as March. They are now seeing the rate falling to 2.5% by the end of 2024, when just last week they envisaged borrowing costs staying above 3%.