January typically heralds one of the busiest periods of the debt capital markets calendar in Europe.
Despite market closures across Europe for Epiphany on Tuesday, issuance got off to a roaring start as borrowers raised €8.75bn in euros on Monday, according to GlobalCapital’s Primary Market Monitor.
And with speculation abound on the path of eurozone rates over the next 12-18 months, the start of this year could prove even busier.
The ECB kicked off its current rate cutting cycle in June 2024, when it slashed the euro base rate from a record high of 4% to 3.75%. A further 175bp of rate cuts followed over the next 12 months.
However, after this rapid descent, the euro base rate has found a floor at a lowly 2%, with inflation hovering nearby.
Of course, as many market veterans are more than aware, this equilibrium will not last forever.
Last month, the ECB opted to keep the base rate unchanged for the fifth time in a row, and some in the market are starting to speculate where they might go next.
ECB board member Isabel Schnabel said in early December she was “rather comfortable” that the market expects the ECB’s next move to be rate rise, albeit not anytime soon, before backtracking on her comments a few weeks later.
For now, many researchers do not expect the ECB to increase interest rates for the foreseeable future but there is no firm consensus on when the mood might change.
Danske Bank anticipates no rate increases until at least 2028, while their Nordea forecast two 25bp rises in the latter half of 2027.
However, that could swiftly change at short notice. Following last month’s meeting, ECB president Christina Lagarde stated that although the euro base rate appears to be “in a good place”, that does not mean it is “static”.
Instead, the central bank is keeping all options on table and will take a “meeting-by-meeting, data-dependent approach, with no rate path set and no set date for any move,” Lagarde said.
However, since the ECB’s Governing Council last met to discuss monetary policy two and a half weeks ago, the US government has staged regime change in Venezuela and is now turning its focus towards Greenland.
For now, this appears to have had minimal impact of the capital markets or inflation. However, things can quickly change: if these turn into prolonged geopolitical crises, inflation could swiftly rise — especially if oil prices are put under immense pressure.
The fragile, benign rate environment looks like it should stay static for now, but the good place could swiftly evaporate at any moment.
The old syndicate banker’s proverb goes “print if you can”. And with uncertainty piling up on the horizon, these might be wise words to follow.