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Insights
April 2, 2024
An Imminent Rate Cut
As inflation continues to fall in the euro zone, the ECB hinted at its last meeting that the first rate cut coming soon, but did not specify any date. This does not mean that there will be a rate cut at every meeting, and the ECB cannot commit to a specific number of cuts. According to Joachim Nagel, the president of the Bundesbank, if the first rate cut comes in June, there could be other pauses later in the year.
The European Central Bank (ECB) has not yet made a decision about the timing of the first rate cut because it wants to see how wage increases, corporate margins, and productivity growth evolve. The objective is very clear: to bring inflation back to 2%. However, the ECB is aware that it will be difficult to wait to have all the relevant information before making a decision, as markets are becoming increasingly impatient. Indeed, if the ECB waits to have all the key economic indicators before deciding on the next rate cut, it runs the risk of adjusting its rates too late and leading the euro zone into a recession.
Currently, the markets are forecasting a rate cut to 2.5% by the end of 2025. However, historically, we have seen that these same markets tend to bet on a very sharp rate cut. For example, in December 2023, more than 75% of the market anticipated the first rate cut as early as March, which did not happen. While it is clear that macroeconomic and inflation data are gradually converging towards a decision to lower rates, it is likely that the rate cut will not be as deep as the market predicts. There is therefore a trade-off to be made between what the ECB actually does and what the market predicts.
What we can therefore offer is a Euribor 3M Daily Range Accrual product to capture the volatility of the euro interest rate market (by selling digital options) with a range of [2.88% - 3.95%]. This will allow investors to obtain a more attractive return over a short period of time. Additionally, investors would receive a coupon every six months, conditional on the evolution of the Euribor index within the predefined range and observed daily.
The European Central Bank (ECB) has not yet made a decision about the timing of the first rate cut because it wants to see how wage increases, corporate margins, and productivity growth evolve. The objective is very clear: to bring inflation back to 2%. However, the ECB is aware that it will be difficult to wait to have all the relevant information before making a decision, as markets are becoming increasingly impatient. Indeed, if the ECB waits to have all the key economic indicators before deciding on the next rate cut, it runs the risk of adjusting its rates too late and leading the euro zone into a recession.
Currently, the markets are forecasting a rate cut to 2.5% by the end of 2025. However, historically, we have seen that these same markets tend to bet on a very sharp rate cut. For example, in December 2023, more than 75% of the market anticipated the first rate cut as early as March, which did not happen. While it is clear that macroeconomic and inflation data are gradually converging towards a decision to lower rates, it is likely that the rate cut will not be as deep as the market predicts. There is therefore a trade-off to be made between what the ECB actually does and what the market predicts.
What we can therefore offer is a Euribor 3M Daily Range Accrual product to capture the volatility of the euro interest rate market (by selling digital options) with a range of [2.88% - 3.95%]. This will allow investors to obtain a more attractive return over a short period of time. Additionally, investors would receive a coupon every six months, conditional on the evolution of the Euribor index within the predefined range and observed daily.
Daily Range Accrual on Euribor 3M | Product Snapshot
For informational purposes only. Not investment advice.
Insights
April 2, 2024
An Imminent Rate Cut
As inflation continues to fall in the euro zone, the ECB hinted at its last meeting that the first rate cut coming soon, but did not specify any date. This does not mean that there will be a rate cut at every meeting, and the ECB cannot commit to a specific number of cuts. According to Joachim Nagel, the president of the Bundesbank, if the first rate cut comes in June, there could be other pauses later in the year.
The European Central Bank (ECB) has not yet made a decision about the timing of the first rate cut because it wants to see how wage increases, corporate margins, and productivity growth evolve. The objective is very clear: to bring inflation back to 2%. However, the ECB is aware that it will be difficult to wait to have all the relevant information before making a decision, as markets are becoming increasingly impatient. Indeed, if the ECB waits to have all the key economic indicators before deciding on the next rate cut, it runs the risk of adjusting its rates too late and leading the euro zone into a recession.
Currently, the markets are forecasting a rate cut to 2.5% by the end of 2025. However, historically, we have seen that these same markets tend to bet on a very sharp rate cut. For example, in December 2023, more than 75% of the market anticipated the first rate cut as early as March, which did not happen. While it is clear that macroeconomic and inflation data are gradually converging towards a decision to lower rates, it is likely that the rate cut will not be as deep as the market predicts. There is therefore a trade-off to be made between what the ECB actually does and what the market predicts.
What we can therefore offer is a Euribor 3M Daily Range Accrual product to capture the volatility of the euro interest rate market (by selling digital options) with a range of [2.88% - 3.95%]. This will allow investors to obtain a more attractive return over a short period of time. Additionally, investors would receive a coupon every six months, conditional on the evolution of the Euribor index within the predefined range and observed daily.
The European Central Bank (ECB) has not yet made a decision about the timing of the first rate cut because it wants to see how wage increases, corporate margins, and productivity growth evolve. The objective is very clear: to bring inflation back to 2%. However, the ECB is aware that it will be difficult to wait to have all the relevant information before making a decision, as markets are becoming increasingly impatient. Indeed, if the ECB waits to have all the key economic indicators before deciding on the next rate cut, it runs the risk of adjusting its rates too late and leading the euro zone into a recession.
Currently, the markets are forecasting a rate cut to 2.5% by the end of 2025. However, historically, we have seen that these same markets tend to bet on a very sharp rate cut. For example, in December 2023, more than 75% of the market anticipated the first rate cut as early as March, which did not happen. While it is clear that macroeconomic and inflation data are gradually converging towards a decision to lower rates, it is likely that the rate cut will not be as deep as the market predicts. There is therefore a trade-off to be made between what the ECB actually does and what the market predicts.
What we can therefore offer is a Euribor 3M Daily Range Accrual product to capture the volatility of the euro interest rate market (by selling digital options) with a range of [2.88% - 3.95%]. This will allow investors to obtain a more attractive return over a short period of time. Additionally, investors would receive a coupon every six months, conditional on the evolution of the Euribor index within the predefined range and observed daily.
Daily Range Accrual on Euribor 3M | Product Snapshot
For informational purposes only. Not investment advice.