ECB hawks try to talk traders out of rate cut bets

FRANKFURT (Reuters) -Two of the European Central Bank’s most prominent hawks on Wednesday joined the chorus of policymakers trying to talk traders out of betting on upcoming rate cuts, so far with no success.

Bundesbank President Joachim Nagel and his Dutch colleague Klaas Knot both said the ECB needed time before declaring victory over historically high inflation and reversing the sharpest streak of rate hike in the euro’s history.

“We must initially remain at the current interest rate plateau so that monetary policy can fully develop its inflation-dampening effect,” Nagel said in an interview with German internet portal T-Online.

“I would say to everyone who is speculating on an imminent interest rate cut: be careful, some people have already miscalculated that.”

He conceded, however, that rates had very likely reached their peak — a comment that was echoed by Knot in his own interview with German financial daily Boersen-Zeitung.

The Dutch central bank governor said the ECB first needed to see data about wage settlements, which would only become available around the middle of next year, making a rate cut before then “rather unlikely”.

“Based on the information available today, I think it is rather unlikely,” the Dutch central bank governor said in response to a question.

He added the ECB’s simulations for the “optimal” path for rates were closer to where market expectations were on Nov. 23, the cutoff date for the central bank’s economic forecasts, than where they are now — that is much lower after softer inflation data.

The two hawks — market jargon for policymakers who favour higher rates — were joining a number of their colleagues in taking aim at market expectations for the ECB to start lowering borrowing costs in March or April.

Yet traders were undeterred, even slightly increasing their bets on lower ECB rates on Wednesday after a weaker-than-expected inflation print in neighbouring Britain.

Money markets were fully pricing in 150 basis points worth of cuts next year, which would take the ECB’s deposit rate to 2.5%, plus a slight risk that it could even end the year at 2.25%.

(Reporting By Francesco Canepa; Editing by Andrew Heavens and Toby Chopra)