STIR
ECB-dated OIS currently price just over 100bps of cuts through the end of 2025, implying a deposit rate of 2.70% through the December ’25 meeting. The current implied market path is broadly consistent with quarterly cuts in H2 2024 (i.e in September and December) but not in 2025.
- The deposit rate would reach 2.25% were the ECB to deliver 25bp cuts at each of the next six quarterly projection meetings. Such a path would align with the dovish contingent of analyst rate forecasts we have seen.
- We think current market pricing appears reasonable at this stage. Concerns around sticky wage-driven services inflation, fiscal policy pressures and a rising neutral rate of interest warrant a wedge between the “quarterly cut” path and current pricing.
- Markets should also remain cognizant of the risk that the ECB chooses to hold rates at one of the September or December meetings.
- Uncertainty around the Fed's rate path and unfavourable developments in core inflation/labour cost outcomes could be enough for some of the Governing Council to err on the side of caution in easing policy this year.
- However, those expecting the ECB to follow through with consistent quarterly cuts through 2025 - as headline inflation returns to the 2% target in line with the June projections - may find value in the September ’25 and December ’25 OIS contracts (See chart).
Source: MNI, Bloomberg
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