Drumbeat for ECB interest rate cuts restarts as bond yields fall

Calls for interest cuts come as government debt markets reflect on slowing eurozone inflation

The governor of the French central bank conceded that official rates were heading lower in 2024, adding to pressure on the ECB to cut interest rates. 

The drumbeat for European Central Bank (ECB) interest rate cuts has restarted as government debt markets reflected on slowing eurozone inflation, and as the governor of the French central bank conceded that official rates were heading lower in 2024.

ECB governing council member François Villeroy de Galhau said the central bank should lower borrowing costs next year, after keeping them at their peak long enough to ensure it has beaten down inflation.

As officials increasingly discuss interest-rate cuts — despite ECB president Christine Lagarde steering clear of the topic — the Bank of France chief called for the deposit rate to stay at 4% as long as necessary, but said the next move will almost certainly be a reduction.

“I want to insist on this patience, this plateau, because if we cut rates too soon we would risk falling back into the sickness of inflation,” Mr Villeroy said.

The remarks come as Eurostat figures showed price inflation across the eurozone slowed sharply to 2.4% in November, from 2.9% in the previous month, with inflation rates in Germany coming in slightly higher than the average.

Ms Lagarde, at the ECB gathering last week, had warned, however, that inflation in some eurozone countries could likely head higher this month for a number of reasons.

One reason was that the effects of the removal of subsidies on energy utility bills, by some European governments, continues to work through the national and eurozone inflation calculations.

Markets continue to reflect financial bets that the ECB will be forced into conceding the case for rate cuts early next year, possibly as early as March, despite what ECB heads are saying at the moment.

As far as such markets reflect expectations for cuts in official interest rates, the yields or interest rates on eurozone government debt fell yesterday, with the 10-year bond yield trading just above 2%.

The yield on the German 10-year bond fell to below 2.1%, its lowest point since mid-January, according to the Trading Economics website. The equivalent Irish 10-year bond also fell, to 2.35%, while the French bond traded at 2.53%.

The ECB opted last week to leave rates unchanged for a second straight meeting, following more than a year of relentless policy tightening.

Ms Lagarde said cuts weren’t discussed on that occasion, despite markets betting on a downward move as soon as the spring, following a dovish pivot by the US Federal Reserve.

Speaking separately yesterday, Lithuanian central bank governor Gediminas Simkus echoed many of his ECB colleagues. He said markets may have got ahead of themselves in anticipating cuts so soon.

“If there are no surprises, then the expectations of early and fast interest-rate cuts may be too optimistic,” he told reporters in Vilnius.

“The only thing that would justify such market bets is for us to be very surprised by inflation moves — meaning that inflation decreases significantly faster than expected,” said Croatian policymaker Boris Vujcic.

• Additional reporting Bloomberg