European Central Bank believed to lead in interest rate cuts

Investors believe the European Central Bank (ECB) will lead the world's major central banks in interest rate cuts after one of the region's most hawkish policymakers described the slowdown in inflation as "encouraging."

Markets are pricing in a nearly 90% probability that the ECB will begin its easing cycle in the first quarter of next year. Currently, there is a 100% probability priced in for five quarter-point rate cuts and an 80% probability for an additional one.

This points to expectations that the ECB deposit rate will be lowered by 150 basis points to 2.5%. While market expectations for rate cuts from central banks globally have increased recently, comments from Isabel Schnabel, one of the ECB's most hawkish members, stating that inflation has shown a "remarkable" slowdown and that another rate hike is "unlikely," have been a factor supporting these expectations.

If traders are correct, the ECB will be the first among major central banks to cut rates next year and will carry out the most aggressive expansionary cycle. The Fed, meanwhile, is expected to make its first rate cut in May, with 125 basis points of cuts anticipated.

The Bank of England is also priced in to begin in June with three 25-basis-point cuts; there is also a 30% probability seen for a fourth rate cut.

On the other hand, following the rise in global rate cut expectations, a government bond index excluding US bonds has climbed to its highest level since April 2022.