MW Morgan Stanley now expects the ECB to cut on Thursday and again in April

By Steve Goldstein

Morgan Stanley says it now expects the European Central Bank to cut interest rates in April as it, like the market, expects a rate cut at Thursday's meeting.

According to LSEG data, there's a 96% implied probability in markets that the ECB on Thursday will cut rates by a quarter-point, which would take the deposit rate down to 2.5%, a level last seen in Feb. 2023.

Economists led by Jens Eisenschmidt say data has been coming in weaker than expected, both on the inflation and growth front, with core inflation lower than expected for February, and purchasing managers indexes also missing expectations.

"All these data are likely to support a view within the [ECB governing council] that rates can be brought fast to a level most council members think is neutral. And we believe this level is 2.0%," the Morgan Stanley team say.

They do say the April meeting is still a close call and note three key releases between now and then - the first estimate at fourth-quarter compensation, the flash PMIs for March and the flash inflation data for March.

After April, the Morgan Stanley team expect another rate cut in June, and that the ECB will take rates down to 1% by June 2026.

The euro $(EURUSD.FOREX)$ has edged up 1% this year as traders balance rate expectations in Europe with those in the U.S.

European stocks XX:SXXP by contrast have gained 10% on expectations of increased government spending as well as a potential boost from a ceasefire between Russia and Ukraine.

-Steve Goldstein

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March 04, 2025 05:13 ET (10:13 GMT)

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