By Yoruk Bahceli and Dhara Ranasinghe
London (Reuters) – A tectonic change in German fiscal policy has aggravated uncertainty for merchants who try to bet on the speed at which the European Central Bank will reduce rates for the rest of the year, with a change to the bank’s advice, strengthening this on Thursday.
The ECB has reduced the rates of 25 base points to 2.50% in its sixth decision since last June. But he said that monetary policy became “significantly less restrictive”, rather than the “restrictive” used before.
This supported the traders, which had already reduced bets on BCE drop drops after an agreement from the next German coalition partners on Tuesday to create an infrastructure fund of € 500 billion (541.40 billion dollars) and revise borrowing restrictions, in part to stimulate defense expenses.
“We could potentially have one more reduction, a maximum of two,” said the main economist of Aviva investors, Vasileios Gkionakis, noting that the BCE’s change of language was a victory for political Hawks and supposed to indicate that an end of rate reduction is coming.
After the ECB’s meeting, merchants also slowed down their bets over a drop in April rates, now seeing less than 50% chance of moving a quarter of points, down more than 60% last week.
Indeed, decision -makers also see an increasing chance of an April break before reducing rates again, once there is greater clarity on trade and budgetary policy, sources in Reuters told.
At the end of the year, price merchants in about 60% of two drops of rate to follow on Thursday, having a price in a chance of a third move last week.
Tax boost vs monetary
The markets hope that the daring decision of Germany to tear its tax book could change the situation for the European economy.
The euro increased to $ 1,0854 on Thursday, the highest since November 6, the day after the election of the American president Donald Trump, and well above the levels of almost $ 1.01 observed in February, while the price concerns weighed.
The bond yields of Germany, the reference for the euro zone, have been set for their largest weekly jump since the early 1990s while the markets were preparing for a loan push.
Remarkably, traders have even passed at prices in the field that the ECB will start increasing the rates next year, since the budgetary boost could increase inflation, seeing around 40% increase in increases by September 2026.
With few details available and the German proposal to be approved, it was not a factor for ECB’s decision on Thursday, but it still blurs the monetary policy prospects, which analysts had already considered less certain.
“If you throw as much money in an economy, you will get a whole difference. It also means that inflation will be higher,” said Mark Dowding, director of RBC BlueBay Asset Management, Mark Dowding.
