Why the Market 100-Percent Thinks Draghi Will Cut Rates Today

European Central Bank President Mario Draghi and his colleagues will cut their deposit rate at least 10 basis points on Thursday, if market expectations are right. Anticipation for a move has built over the past three months as stocks gyrated, crude oil slumped, and inflation expectations fell. Here's a timeline:

At the beginning of the year, market pricing implied about a 50 percent probability that rates would drop below minus 0.3 percent in March. Chances of a move climbed around the January ECB meeting, especially as Draghi pledged during follow-up speeches that policy makers have “no limits” on how far they’re willing to deploy measures within their mandate.

By mid-February, at the same time as stocks staged an even steeper decline, virtually all market participants decided a rate increase was imminent. Inflation has shown no signs of materializing since, reinforcing that expectation.

“It was really Draghi's comments, and the further drop in inflation — and we also had a drop in core inflation — which I think made a lot of economists and analysts turn around and say the ECB had to act,” said Carsten Brzeski, chief economist at ING-Diba AG in Frankfurt, adding that poor consumer confidence readings probably helped to cement expectations. “That's probably why we have a fully-priced, 100 percent consensus view that the ECB will act.”

(For more economic analysis, see Benchmark)

To contact the author of this story: Jeanna Smialek in Washington at jsmialek1@bloomberg.net.

To contact the editors responsible for this story: Jeff Black at jblack25@bloomberg.net, Zoe Schneeweiss at zschneeweiss@bloomberg.net.

By: Jeanna Smialek

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