ECB Likely To Shrink Balance Sheet Earlier Than Expected

November 29, 2023 11:24

Comments from European Central Bank’s board members regarding the shrinking of the bank’s balance sheet sparked discussions among economists as “higher for longer” interest rates in the euro bloc could be here to stay.

The New Zealand dollar jumped by 1% and hit a four-month high  early in the morning although the RBNZ kept its borrowing costs on hold as the central bank’s board noted that “if inflationary pressures were to be stronger than anticipated, the OCR would likely need to increase further.”

Later today, the US Bureau of Economic Analysis (BEA) will release preliminary data regarding the GDP growth rate in the third quarter of 2023 which is expected to come in at 5% on an annualised basis.

On Thursday, Eurostat will publish its preliminary consumer price inflation report for the month of November. Market analysts expect headline inflation to come in at 2.7% on an annualised basis.

ECB Policymakers Discuss Balance Sheet Shrinking

The ECB’s board member Joachim Nagel said that the eurozone’s central bank should reduce its balance sheet which could be done by selling quantities of bonds that have been stored there in the last few years. Economists suggest that shrinking the ECB’s balance sheet would increase the market supply and would suggest that interest rates are going to remain higher for longer, strengthening the single currency against the US dollar.

The ECB’s head Christine Lagarde said before the European Parliament (EP) that the bank could consider discussing accelerating the shrinkage of the balance sheet by ending the last of its bond purchases earlier than planned. Some ECB policymakers have spoken in favour of such action as they believe that bond purchases feed inflationary pressures recorded in the euro bloc. It should be noted that the Federal Reserve and the Bank of England have stopped purchasing bonds.

Deutsche Bank Forecasts 175bps Fed Rate Cuts In 2024

Analysts at Deutsche Bank (DB) suggested in a report that the Fed could move forward with cutting its interest rates by 175 basis points during 2024. More specifically, DB economists forecast the Fed board to reduce rates by 50bps in its June 2024 meeting with the rest 125bps cuts spread in the second half of the year.

The report published by Reuters mentions that the US economy is likely to face a mild recession in the first half of the next year, adding that “we see the economy hitting a soft patch in the first half of the year that results in a more aggressive cutting profile starting in mid-year.” DB analysts suggest that the US unemployment rate could rise to 4.6% but note that if the economy proves more resilient than projected, the Fed could proceed with fewer cuts.

PBoC Says Chinese Economy Is Improving

The People’s Bank of China Governor Pan Gongsheng said that the Chinese economy continues to gain momentum while consumer price inflation bottoms out. The PBoC head suggested that the country should focus on forming new growth drivers and noted that achieving sustainable growth in 2024 is possible.

In his remarks, Pan Gongsheng mentioned that the PBoC would make it easier for financial institutions to do business in China and stressed that the central bank’s monetary policy would remain accommodative.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Miltos Skemperis
Miltos Skemperis Financial Content Writer

Miltos Skemperis’ background is in journalism and business management. He has worked as a reporter on various TV news channels and newspapers. Miltos has been working as a financial content writer for the last seven years.