El-Erian: Market mispricing, expecting ECB rate cut to exceed Fed's
Mohamed El-Erian, President of Queen's College, Cambridge University, stated that the market's expectation of simultaneous interest rate cuts by the European Central Bank and the Federal Reserve is incorrect. He believes that the rate cut by the European Central Bank will exceed that of the Federal Reserve, despite the weakness in the Eurozone economy. El-Erian also mentioned that European bonds and UK gilts are attractive, and emphasized that the Federal Reserve should not overly focus on every economic data point when formulating policies
Intelligence Finance learned that Mohamed El-Erian, President of Queen's College, Cambridge University, said that investors have mispriced the prospect of the European Central Bank cutting interest rates significantly like the Federal Reserve. El-Erian, former CEO of Pacific Investment Management Company (PIMCO), said in an interview, "The market expects the European Central Bank to cut interest rates by the same magnitude as the Federal Reserve. I don't think that will happen. I think you will see the European Central Bank cutting rates more than the Federal Reserve."
Despite the much weaker Eurozone economy, interest rate swaps show that traders are betting that the European Central Bank will cut the benchmark interest rate by about 140 basis points before September 2025, almost the same as the rate cut in the United States. This contrasts sharply with the different economic backgrounds of the two regions. In the last quarter, the U.S. economy grew by 3%, while the Eurozone's growth rate was 0.2%.
This week, the European Central Bank cut the key deposit rate for the third time this year, lowering it by 25 basis points to 3.25%. However, officials did not specify when or at what pace they would lower borrowing costs in the future. El-Erian agrees with his former colleagues at PIMCO that European bonds, including German government bonds and UK gilts, are attractive.
As for the United States, El-Erian reiterated that the Federal Reserve should not focus too much on every economic data point when formulating policy. The Federal Reserve cut the benchmark interest rate by 50 basis points last month, surprising some investors who expected a smaller rate cut. After announcing a stronger-than-expected jobs report, Federal Reserve officials hinted that they would cautiously implement monetary easing policies.
Speaking about the Federal Reserve's communication, El-Erian said, "In July, we didn't need a rate cut. In mid-September, we needed a 50 basis point cut. Now, we're talking about a cautious approach to rate cuts. For a policy maker who should provide guidance not only for the United States but also for countries outside the United States, this is a huge swing. I think people have realized that it's time to move away from relying on data."