Market needs urgent correction! ECB rate cut to exceed Fed's
Mohamed El-Erian, Chief Economic Advisor at Allianz, believes that the market has underestimated the prospect of rate cuts by the European Central Bank, expecting the rate cut to exceed that of the Federal Reserve. Despite the weakness in the Eurozone economy, interest rate swaps indicate that traders are betting on a rate cut of around 140 basis points. El-Erian points out that the rate cut by the European Central Bank will exceed that of the Federal Reserve, and emphasizes that the Federal Reserve should not overly focus on every economic data point
Mohamed El-Erian, Chief Economic Advisor of Allianz and President of Queens' College, University of Cambridge, believes that investors have mistakenly assessed the prospect of a rate cut by the European Central Bank.
Despite the much weaker Eurozone economy, interest rate swap trading shows that traders are betting that the ECB will cut its benchmark rate by about 140 basis points before September 2025, almost the same magnitude as the U.S. cut. This sharp contrast is formed against the backdrop of the two regions' different economic situations. The U.S. economy grew by 3% in the last quarter, while the Eurozone only grew by 0.2%.
The former CEO of Pacific Investment Management Company (Pimco) stated in an interview, "The market expects the ECB and the Fed to cut rates by the same amount. I don't think that will happen. I think you will see the ECB cutting rates more than the Fed."
The ECB cut its key deposit rate by 25 basis points to 3.25% on Thursday for the third time this year. However, officials did not specify when or at what pace they would lower borrowing costs in the future.
El-Erian, also a columnist for Bloomberg, agreed with his former colleagues at Pimco that European debt, including German bonds, and UK gilts are attractive.
Regarding the U.S., El-Erian reiterated that the Fed should not overly focus on every economic data point when making policy decisions.
The Fed cut rates by 25 basis points last month, surprising some investors who expected a smaller cut. However, after a stronger-than-expected non-farm payrolls report was released, Fed officials stated that they would cautiously implement monetary easing.
El-Erian commented on the Fed's communication, saying, "In July, we didn't need a rate cut. By mid-September, we needed a 50 basis point cut. Now, we are talking about a cautious approach to rate cuts."
"This is a huge swing for policymakers who should be setting guidance not just for the U.S., but also for regions outside the U.S.," he added. "I think people have realized that it's time to move away from relying on data."