ECB's Balancing Act: Shrinking Balance Sheet, Rate Cuts, and Reckoning Ahead
The European Central Bank (ECB) is expected to focus on shrinking its balance sheet as investors anticipate rate cuts. With inflation at a two-year low, the ECB has room to reduce its balance sheet without causing significant yield spread disruptions. However, market expectations for rate cuts may need to be adjusted after the ECB's meeting. Inflation has declined, leading to increased bets on rate cuts next year. The ECB's key deposit rate is currently at a record high of 4%. The bank may also consider ending reinvestments of its Pandemic Emergency Purchase Program (PEPP) in the near future.