--- title: "ECB preview: a welcome move towards normalisation, but what lies ahead?" description: "Next week, the European Central Bank (ECB) is likely to embark on a new phase of its monetary policy:\nnormalisation. After maintaining very restrictive rates to combat higher-than-target inflation, the ECB is poised to ease this restrictiveness. The first rate cut, expected next week, comes 266 days after the last rate hike, closely aligning with the historical average between cycles. Based on recent comments from ECB members, the rate cut is almost a certainty. However, the path to the terminal rate, which should be the neutral rate—which neither stimulates nor restrains the economy—will be long and winding." image: https://blog.syzgroup.com/hubfs/Syz_Flash_2024-05-31_cover.jpg --- [![Syz Private banking](https://blog.syzgroup.com/hs-fs/hubfs/Logo.png?width=140&name=Logo.png "Syz Private banking")](https://www.syzgroup.com/fr) ## **Thinking** out loud [Subscribe](https://25733253.hs-sites-eu1.com/newsletter-signup?hsLang=en) [![Contact Us](https://hubspot-no-cache-eu1-prod.s3.amazonaws.com/cta/default/25733253/3d762f49-4e71-4f99-97b1-bf6781ef3da2.png)](https://hubspot-cta-redirect-eu1-prod.s3.amazonaws.com/cta/redirect/25733253/3d762f49-4e71-4f99-97b1-bf6781ef3da2) - [OUR SERVICES](https://www.syzgroup.com/en/private-banking) - [ABOUT SYZ](https://www.syzgroup.com/en/about/welcome-to-syz) - [CAREERS](https://www.syzgroup.com/en/careers) - [PRESS](https://www.syzgroup.com/en/news) - [Blog Homepage](https://blog.syzgroup.com) - [Slow Food for Thought](https://blog.syzgroup.com/slow-food-for-thought) - [Focus](https://blog.syzgroup.com/slow-food-for-thoughts/tag/focus) - [Asset allocations Insights](https://blog.syzgroup.com/slow-food-for-thoughts/tag/asset-allocation-insights) - [Market Outlook](https://blog.syzgroup.com/slow-food-for-thoughts/tag/market-outlook) - [Swiss Perspectives](https://blog.syzgroup.com/slow-food-for-thoughts/tag/swiss-perspectives) - [Syz the moment](https://blog.syzgroup.com/syz-the-moment) - [Crypto corner](https://blog.syzgroup.com/crypto-corner) - [Syz AI Insights](https://blog.syzgroup.com/syz-ai-insights) - [Fast Food for Thought](https://blog.syzgroup.com/fast-food-for-thought) - [The week in seven charts](https://blog.syzgroup.com/fast-food-for-thoughts/tag/the-week-in-seven-charts) - [Flash](https://blog.syzgroup.com/fast-food-for-thoughts/tag/flash) - [Fixed Income Weekly](https://blog.syzgroup.com/fast-food-for-thought/tag/weekly-fixed-income) - [Equity Weekly](https://blog.syzgroup.com/fast-food-for-thought/tag/weekly-equities) - [Global markets outlook](https://blog.syzgroup.com/fast-food-for-thoughts/tag/global-markets-outlook) - [CONTACT](https://www.syzgroup.com/en/contact-us/form) - [ENGLISH](https://www.syzgroup.com/) - [FRANÇAIS](https://www.syzgroup.com/fr) - [Slow Food for Thought](https://blog.syzgroup.com/slow-food-for-thought) - [Focus](https://blog.syzgroup.com/slow-food-for-thoughts/tag/focus) - [Asset allocations Insights](https://blog.syzgroup.com/slow-food-for-thoughts/tag/asset-allocation-insights) - [Market Outlook](https://blog.syzgroup.com/slow-food-for-thoughts/tag/market-outlook) - [Swiss Perspectives](https://blog.syzgroup.com/slow-food-for-thoughts/tag/swiss-perspectives) - [Fast Food for Thought](https://blog.syzgroup.com/fast-food-for-thought) - [Flash](https://blog.syzgroup.com/fast-food-for-thoughts/tag/flash) - [Weekly Fixed Income](https://blog.syzgroup.com/fast-food-for-thought/tag/weekly-fixed-income) - [The week in seven charts](https://blog.syzgroup.com/slow-food-for-thoughts/tag/the-week-in-seven-charts) - [Global markets outlook](https://blog.syzgroup.com/fast-food-for-thoughts/tag/global-markets-outlook) - [Weekly Equities](https://blog.syzgroup.com/fast-food-for-thought/tag/weekly-equities) - [Syz the moment](https://blog.syzgroup.com/syz-the-moment) - [Crypto corner](https://blog.syzgroup.com/crypto-corner) - [Syz AI Insights](https://blog.syzgroup.com/syz-ai-insights) - [Our Services](https://www.syzgroup.com/en/private-banking) - [About Syz](https://www.syzgroup.com/en/about/welcome-to-syz) - [Careers](https://www.syzgroup.com/en/careers) - [Press](https://www.syzgroup.com/en/news) - [Contact](https://www.syzgroup.com/en/contact-us/form) - [English](https://www.syzgroup.com/) - [Français](https://www.syzgroup.com/fr) ## **Sign-up** for our newsletter This website uses cookies to enhance user navigation and to collect statistical data. 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If you made a mistake, please change here USA Country Switzerland Canada: Other than Ontario, Quebec, Alberta Canada: Ontario, Quebec or Alberta USA Other country Language Language English French German Italian I confirm Legal information This marketing document has been issued by Bank Syz Ltd. It is not intended for distribution to, publication, provision or use by individuals or legal entities that are citizens of or reside in a state, country or jurisdiction in which applicable laws and regulations prohibit its distribution, publication, provision or use. It is not directed to any person or entity to whom it would be illegal to send such marketing material. This document is intended for informational purposes only and should not be construed as an offer, solicitation or recommendation for the subscription, purchase, sale or safekeeping of any security or financial instrument or for the engagement in any other transaction, as the provision of any investment advice or service, or as a contractual document. Nothing in this document constitutes an investment, legal, tax or accounting advice or a representation that any investment or strategy is suitable or appropriate for an investor's particular and individual circumstances, nor does it constitute a personalized investment advice for any investor. This document reflects the information, opinions and comments of Bank Syz Ltd. as of the date of its publication, which are subject to change without notice. The opinions and comments of the authors in this document reflect their current views and may not coincide with those of other Syz Group entities or third parties, which may have reached different conclusions. The market valuations, terms and calculations contained herein are estimates only. The information provided comes from sources deemed reliable, but Bank Syz Ltd. does not guarantee its completeness, accuracy, reliability and actuality. Past performance gives no indication of nor guarantees current or future results. Bank Syz Ltd. accepts no liability for any loss arising from the use of this document. [Food for Thought](https://blog.syzgroup.com/fast-food-for-thought/tag/food-for-thought) ### ECB preview: a welcome move towards normalisation, but what lies ahead? Next week, the European Central Bank (ECB) is likely to embark on a new phase of its monetary policy: normalisation. After maintaining very restrictive rates to combat higher-than-target inflation, the ECB is poised to ease this restrictiveness. The first rate cut, expected next week, comes 266 days after the last rate hike, closely aligning with the historical average between cycles. Based on recent comments from ECB members, the rate cut is almost a certainty. However, the path to the terminal rate, which should be the neutral rate—which neither stimulates nor restrains the economy—will be long and winding. [![Gaël Fichan](https://blog.syzgroup.com/hubfs/gael.jpg)](https://blog.syzgroup.com/fast-food-for-thought/author/gaël-fichan) [**Gaël Fichan**](https://blog.syzgroup.com/fast-food-for-thought/author/gaël-fichan) Head Fixed Income & Senior Portfolio Manager **Friday, 05/31/2024** | - [![Pdf](https://blog.syzgroup.com/hubfs/pdf%20(1).png)](https://blog.syzgroup.com/hubfs/Syz_Flash_2024-05-31b.pdf?hsLang=en) - - - - ## A long and sinuous path to normalisation: Estimating the neutral rate, or R\*, is challenging, especially during significant economic transitions, such as the shift from manufacturing to services or shocks like COVID-19. Currently, the consensus among central bankers, economists, and the market is that the real neutral rate is around 0.5%-1.0%, suggesting a terminal rate of about 2.5%-3.0%.   **Chart 1: Projected path of European rates by the market** **![](https://blog.syzgroup.com/hs-fs/hubfs/image-png-May-31-2024-12-26-35-1365-PM.png?width=513&height=344&name=image-png-May-31-2024-12-26-35-1365-PM.png)** Source: CIO Office, Bloomberg Chart 1 illustrates that the market anticipates it will take at least two years for the ECB to reach the neutral rate, indicating a prolonged period of restrictive policy. ECB Chief Economist Philip Lane’s recent comments underscore this cautious approach: “We still need to be restrictive all year long.” The consensus view of one rate cut per quarter points to a gradual path to normalisation. A key question for the upcoming meeting is whether the ECB will signal another rate cut in July. --- ## The ECB balance sheet: not on the agenda this time   While the Federal Reserve announced a reduction in its quantitative tightening starting June 1st, 2024, the ECB has indicated it will consider this only in the second half of 2024. ECB executive member Isabel Schnabel recently noted that the ECB’s large balance sheet “may have weakened the transmission of monetary policy during this recent tightening cycle.” **Chart 2: ECB balance sheet as a percentage of European GDP** **![](https://blog.syzgroup.com/hs-fs/hubfs/image-png-May-31-2024-12-30-15-6306-PM.png?width=518&height=364&name=image-png-May-31-2024-12-30-15-6306-PM.png)**Source: CIO Office, Bloomberg Even though ECB President Christine Lagarde stated on April 11th that “the size of our balance sheet has significantly reduced already,” Chart 2 shows that the ECB balance sheet relative to European GDP is still well above pre-pandemic levels. Therefore, significant discussions or actions regarding the balance sheet are unlikely at this meeting.     --- ## The ECB and the Fed: ## an inescapable connection The ECB’s actions are often influenced by the Federal Reserve. A significant interest rate differential between the Eurozone and the U.S. could weaken the euro, exacerbate inflation, and negatively impact the European economy. Currently, there is a substantial gap between short-term interest rates in the U.S. and Europe. Markets expect both the Fed and the ECB to reach their terminal rates around the same time or within one quarter of each other, with the Fed’s terminal rate expected to be around 4%-4.2%. We believe the ECB cannot operate independently from the Fed. **Chart 3: Impact of short-term rate differential on EUR/USD exchange rate** ![](https://blog.syzgroup.com/hs-fs/hubfs/image-png-May-31-2024-12-33-33-7684-PM.png?width=504&height=384&name=image-png-May-31-2024-12-33-33-7684-PM.png) Source: CIO Office, Bloomber Chart 3 illustrates the current significant differential between U.S. and Eurozone short-term rates. This disparity can put downward pressure on the euro, making European exports cheaper but increasing the cost of imports priced in dollars. If the current gap remains stable, the EUR/USD exchange rate should remain relatively steady. The paths of ECB and Fed monetary policies are closely aligned according to market expectations, mitigating the risk of significant fluctuations. However, as the ECB begins to cut rates,it must carefully consider the implications of potentially widening the interest rate gap with the U.S. Too aggressive a rate-cutting cycle could lead to a sharp depreciation of the euro, undermining the ECB’s inflation control efforts. Conversely, maintaining too restrictive a policy could stifle economic growth within the Eurozone. The ECB needs to navigate this landscape carefully. While the first-rate cut is intended to reduce some of the current restrictiveness, the policy must still remain sufficiently tight to prevent the euro from depreciating too rapidly. A balanced, data-driven approach will be crucial to manage these economic forces and ensure sustainable growth while keeping inflation in check.         --- ## Implications for European fixed income The upcoming ECB meeting is likely to provide some relief for European government bonds. However, a sharp rally in yields is unlikely unless the ECB pairs the rate cut with a firm commitment to subsequent cuts in July. As depicted in Chart 4, the market has already priced in some rate cuts. **Chart 4: ECB Deposit Rate vs. 5-year German Yield (%)** **![](https://blog.syzgroup.com/hs-fs/hubfs/image-png-May-31-2024-12-42-09-4208-PM.png?width=501&height=333&name=image-png-May-31-2024-12-42-09-4208-PM.png)** Source: CIO Office, Bloomber The short end of the yield curve stands to benefit the most from the ECB’s anticipated actions, provided the central bank does not adopt an overly cautious tone. Recent data on European wages and inflation does not support a rapid succession of rate cuts. The long end of the curve may see limited benefits, given that the European yield curve is still inverted by 36 basis points. Additionally, European financial conditions are highly accommodative, near their peak levels according to the Bloomberg Eurozone Financial Conditions Index. The ECB is unlikely to maintain such favorable conditions indefinitely. However, if President Lagarde hints at a consistent pace of rate cuts in future meetings, the 10-year German yield could respond positively. Nonetheless, our base case scenario is that the ECB will remain highly data-dependent and cautious.   --- ## Conclusion The upcoming ECB meeting marks the beginning of a gradual path towards normalisation. While the first rate cut is a welcome change, the journey to achieving the neutral rate will be long and cautious. The ECB’s focus will remain on balancing the need to control inflation with the desire to support economic growth. The European recovery is underway, but European wages, especially in the services sector, remain at high levels. Additionally, European inflation is plateauing, adding complexity to the ECB’s decision- making process. As the ECB navigates this delicate balance, monetary policy adjustments will aim to support economic growth without destabilising the economy. If successful, these adjustments could lead to a steepening of the European yield curve, a development eagerly anticipated by investors for some time. The ECB’s careful, data-driven approach will be crucial in managing these interconnected economic factors and ensuring a sustainable recovery.   --- #### Disclaimer This marketing document has been issued by Bank Syz Ltd. It is not intended for distribution to, publication, provision or use by individuals or legal entities that are citizens of or reside in a state, country or jurisdiction in which applicable laws and regulations prohibit its distribution, publication, provision or use. It is not directed to any person or entity to whom it would be illegal to send such marketing material. This document is intended for informational purposes only and should not be construed as an offer, solicitation or recommendation for the subscription, purchase, sale or safekeeping of any security or financial instrument or for the engagement in any other transaction, as the provision of any investment advice or service, or as a contractual document. Nothing in this document constitutes an investment, legal, tax or accounting advice or a representation that any investment or strategy is suitable or appropriate for an investor's particular and individual circumstances, nor does it constitute a personalized investment advice for any investor. This document reflects the information, opinions and comments of Bank Syz Ltd. as of the date of its publication, which are subject to change without notice. The opinions and comments of the authors in this document reflect their current views and may not coincide with those of other Syz Group entities or third parties, which may have reached different conclusions. The market valuations, terms and calculations contained herein are estimates only. The information provided comes from sources deemed reliable, but Bank Syz Ltd. does not guarantee its completeness, accuracy, reliability and actuality. Past performance gives no indication of nor guarantees current or future results. Bank Syz Ltd. accepts no liability for any loss arising from the use of this document. Read More ## Related Articles [The week in seven charts](https://blog.syzgroup.com/fast-food-for-thought/tag/the-week-in-seven-charts) #### [Four years into the bull market](https://blog.syzgroup.com/fast-food-for-thought/four-years-into-the-bull-market?hsLang=en) Meanwhile, earnings growth, not valuation expansion, is doing the heavy lifting behind the S&P 500’s rally. Each week, the Syz investment team takes you through the last seven days in seven charts. **[Charles-Henry Monchau, CFA, CMT, CAIA](https://blog.syzgroup.com/author/charles-henry-monchau?hsLang=en)** | 12/10/2026 [The week in seven charts](https://blog.syzgroup.com/fast-food-for-thought/tag/the-week-in-seven-charts) #### [Is France’s sovereign debt heading towards “junk” territory?](https://blog.syzgroup.com/fast-food-for-thought/is-frances-sovereign-debt-heading-towards-junk-territory?hsLang=en) Meanwhile, what does Anthropic’s $2tn valuation assume about future growth? Each week, the Syz investment team takes you through the last seven days in seven charts. **[Charles-Henry Monchau, CFA, CMT, CAIA](https://blog.syzgroup.com/author/charles-henry-monchau?hsLang=en)** | 05/10/2026 [The week in seven charts](https://blog.syzgroup.com/fast-food-for-thought/tag/the-week-in-seven-charts) #### [The 10-year Treasury yield hits a 19-year high](https://blog.syzgroup.com/fast-food-for-thought/the-10-year-treasury-yield-hits-a-19-year-high?hsLang=en) Meanwhile, US earnings growth leaves the rest of the world behind. Each week, the Syz investment team takes you through the last seven days in seven charts. **[Charles-Henry Monchau, CFA, CMT, CAIA](https://blog.syzgroup.com/author/charles-henry-monchau?hsLang=en)** | 28/09/2026 ## Straight from the Desk # Syz the moment Live feeds, charts, breaking stories, all day long. 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