(Bloomberg) -- Investors are mispricing the prospect that the European Central Bank will lower interest rates as much as the Federal Reserve, according to Mohamed El-Erian, the president of Queens’ College, Cambridge.
Despite a much weaker economy in the euro zone, interest-rate swaps show that traders are betting the ECB will lower benchmark rates by about 140 basis points by September 2025, almost the same amount in the US. That’s in contrast with the diverging economic backdrop in the two regions. The US economy expanded 3% last quarter, compared with a growth rate of 0.2% in the euro zone.
“The market is pricing in the same amount of cuts from the ECB and the Fed,” said El-Erian, the former chief executive officer at Pacific Investment Management Co., in an interview on Bloomberg Television. “I don’t think that’s what’s going to happen. I think you are going to see the ECB cut more than the Fed.”
The ECB this month lowered the key deposit rate for the third time this year, cutting it by a quarter-point to 3.25%. Officials, however, didn’t specify when or how quickly borrowing costs will be reduced in the future.
El-Erian, who is also a Bloomberg Opinion columnist, said he agrees with his former colleagues at Pimco that European debt, including German bunds, and the UK gilts are attractive.
As for the US, E-Erian reiterated that the Fed shouldn’t be overly focused on every single economic data in determining their policy.
The Fed cut the benchmark borrowing costs by half a percentage point last month, surprising some investors who expected a smaller reduction. Following a stronger-than-expected payroll report, Fed officials have since signaled that they will carry out monetary easing with caution.
“In July, we didn’t need a rate cut,” said El-Erian about the Fed’s communication. “Mid-September, we needed a 50 basis point rate cut. Now, we are talking about caution on rate cuts. That is huge volatility from a policymaker that is supposed to set guidance for not just the US, but well beyond the US.”
“I think there is realization that it’s time to get out of this data dependency,” He added.
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