LONDON, March 7 (Reuters) - Recent developments in German fiscal policy have increased uncertainty for traders speculating on the speed of European Central Bank rate cuts for the remainder of the year. The bank's revised guidance on Thursday reinforced this uncertainty.
Following the ECB's decision to reduce rates by 25 basis points to 2.50%, it shifted its stance from describing monetary policy as "restrictive" to "meaningfully less restrictive."
Traders reacted positively to this change, scaling back their expectations for ECB rate cuts after news from Germany's future coalition partners about a 500 billion euro ($541.40 billion) infrastructure fund and relaxed borrowing restrictions, with a focus on defense spending.
Aviva Investors senior economist Vasileios Gkionakis suggested, "We could potentially see one more cut, maximum two," interpreting the ECB’s shift as a signal that rate cuts might cease.
Following the ECB meeting, traders revised downwards their bets on an April rate cut, now foreseeing less than a 50% likelihood of a quarter-point move, compared to over 60% the previous week.
Markets are now eyeing the possibility of a pause in April before further rate cuts, pending greater clarity on trade and fiscal policies.
The proposed fiscal changes in Germany have sparked optimism in markets, potentially impacting inflation and interest rates. Analysts perceive this development as a decisive factor in reevaluating rate cut expectations.
Despite the positive market sentiment, uncertainties persist, particularly regarding the implementation of fiscal measures across Europe. The ECB remains cautious in the face of ongoing trade tensions and weakened investment, leading to a downward revision of growth forecasts.
With looming tariff implications and the uncertainty surrounding the eurozone's growth trajectory, the market outlook remains uncertain.
Notably, the ECB's imminent decisions stand in contrast to earlier expectations of certain rate cuts. The outcome of potential fiscal changes and their impact on policy decisions remains a critical unknown.
As the effects of tariffs continue to unfold, skepticism prevails. Expectations vary among market experts regarding the extent and timing of rate cuts in response to evolving trade dynamics and fiscal policies.