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ECB’s Vasle says more 2024 cuts probable in baseline scenario

Bloomberg • 3 min read
ECB’s Vasle says more 2024 cuts probable in baseline scenario
The ECB last week lowered borrowing costs by a quarter point, having kept it at 4% for nine months. Photo: Bloomberg
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More euro-area interest-rate reductions are likely if the European Central Bank’s expectations for a further slowdown in inflation materialise, according to Governing Council member Bostjan Vasle.

“If the baseline scenario is realised and the data are favourable, then we can probably expect further rate cuts already this year, and then also next year,” the Slovenian central bank chief told Finance newspaper. “Otherwise, it would be appropriate to wait some more time with further steps.”

The ECB last week lowered borrowing costs by a quarter point. It also raised inflation forecasts for 2024 and 2025 — a decision that has left investors in the dark as what to happens next.

“There are still many risks that the process of disinflation could slow down,” Vasle said, citing “relatively strong” momentum in wages, economic growth and geopolitics.  

EU bonds fall after MSCI rejection

See also: Retail investors pull record GBP1.8 bil from UK equity funds

Meanwhile, the European Union’s bonds fell on Thursday as bets they would soon be added to key sovereign benchmarks received an early blow. 

The yield on 10-year notes rose six basis points to 3.15%, leading losses in the region, after MSCI announced late Wednesday it won’t add the bloc’s debt to its range of government bond indexes because of divided responses to its consultation on the topic. 

The EU is currently treated as a supranational issuer by index compilers, which the bloc cites as a key reason why its borrowing costs are higher than those of European governments with similar ratings. The rejection dents a wave of speculation that the bloc would swiftly be added to the more widely-followed government benchmarks from MSCI and others, which had helped the bonds to rally in recent months.

See also: UK economy expands by 0.4% in May, double the expected pace

MSCI’s decision “was not in line with our or the market’s expectations,” a Citigroup team led by Jussi Harju wrote in a note to clients. “The rejection could dissuade other index providers from even launching such consultations in the near-term.”

Reclassifying the EU is a thorny concept, with the bloc politically divided on many traditional hallmarks of sovereignty, including joint debt issuance itself. Yet several investors have publicly backed including EU securities in government indexes. 

An EU survey of investors last year found index inclusion was “the single-most important remaining step in order for EU-bonds to trade and price similarly to European government bonds”. 

MSCI was not the first index-provider to formally float reclassification. Intercontinental Exchange Inc. launched its own consultation back in April, with its decision due to be announced in August.

“Medium-term, the crucial question remains how other major index providers will react, as they have been tight-lipped about similar plans,” said Hauke Siemssen, an analyst at Commerzbank AG.

Photo: Bloomberg

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