The European Central Bank’s policy-setting governing council, scheduled to meet on Thursday 6 June 2024, marks the first time in nearly five years that key banking rates in the eurozone will be lowered. Leading economists surveyed by Delano unanimously agree on this development, anticipating a 25 basis point decrease as the outcome of the meeting. However, the macroeconomic circumstances remain uncertain on several fronts, including wage and service inflation pressures, as well as further divergence from rates set by the US Federal Reserve.
David Chappell, senior fund manager fixed income at Columbia Threadneedle Investments, noted that had the council members not preemptively agreed to a June cut, telling Delano that “there would have been a heated debate around whether to wait for more data following the less than supportive wage and inflation prints over the last couple of weeks.” It is highly likely that ECB president Christine Lagarde “will guide markets to a hold in July, with the next adjustment either in September or October,” said Chappell.
Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, stated that the ECB is all but certain to cut rates at its meeting on 6 June and that it is “likely to be unanimously approved by the governing council.” However, Ducrozet anticipates that the “governing council will stick to its current approach of taking decisions based on incoming data, one meeting at a time,” but added, “markets will focus on the updated staff projections” for any potential future rate cuts. He expects the GDP growth and inflation projections for 2024 “should be revised slightly higher,” reflecting recent developments.
Jörg Held, head of portfolio management at Ethenea, agreed that “a rate cut at the June meeting is seen as a foregone conclusion given the very clear statements made by several ECB members.” He added, “we therefore expect three rate cuts by the end of 2024, provided that the inflation trend continues to be confirmed.”
Evelyn Herrmann, economist at Bank of America Securities, expects the ECB to cut policy rates by 25bps this week and affirm a “data dependence and the need to proceed cautiously” approach by the council members. Herrmann expects the “soft guidance” on Thursday to indicate that for the governing council “there is no pre-set path and that all meetings are live, meeting-by-meeting is the way to go.” Nonetheless, Herrmann expects 75bps of deposit rate cuts in total for 2024, and another 125bps in 2025, “on the back of inflation falling back below the 2% target next year.”
Paul Jackson, global head of asset allocation research at Invesco, stated that the members of the ECB Council have consistently signalled that the first rate cut will come in June, but there is less clarity about the timing of subsequent cuts. “I suspect they will hold in July to assess the impact of the first rate cut,” said Jackson. He thinks “a rate cut is possible in any of the three remaining meetings during 2024, giving a total of two or three cuts this year--depending on when the Fed eases.”
Ulrike Kastens, senior economist at DWS, said, “The rate cut in June is all but certain. However, what matters even more is the path ahead,” summarising the general market sentiment. She argued that given the ongoing elevated wage increases, a very stable job market, and the pause in the disinflationary trend, it seems appropriate for the ECB to remain data-dependent and to adopt a meeting-by-meeting approach. She also noted, “This implies that ECB president Lagarde will avoid any pre-commitment to another rate cut in July. We maintain our expectation of three more rate cuts in September, December and March 2025.”
Hugo Le Damany, eurozone economist at AXA Investment Managers, recalling the ECB’s ‘data dependence mode,’ said, “real interest rates would be reduced but remain in restrictive territory as long as they have not achieved sufficient confidence in inflation development, particularly in services inflation. The path will also depend on the evolution of wages, profits and productivity, which are forward indicators for inflation.”
Andrzej Szczepaniak, senior economist at Nomura, said, “a June rate cut can be thought of as removing the September insurance rate hike,” anticipating there would be no rate cut commitments beyond June. Commenting on whether the ECB can decouple from the Feds and go alone, Szczepaniak stated, “We think so, as long as the macro data allows. However, we see risks that the euro area could be going down the US route.” With stronger activity data, resilient demand, an encouraging labour market, stronger-than-expected wage growth and still sticky services inflation, Szczepaniak believes the ECB will end up cutting only gradually to maintain some level of monetary restrictiveness. However, he cautioned, “cutting too much too quickly will unnecessarily refuel the embers of inflation and undo the ECB’s hard-fought battle.”
Yasser Talbi, fixed income portfolio manager at Indosuez Wealth Management, affirmatively stated, “the ECB will cut interest rates in June but it is unlikely to cut in July.” Talbi forecasted, “we think that by December 2025 the ECB will likely lower rates to at least 2.5% with three to four cuts this year.”
Samuel Zief, head of global FX strategy at JP Morgan Private Bank, agreed that the ECB will implement the 25bps rate cut on Thursday, noting, “They’ve signed and sealed over the past several months.” However, he remarked, “We expect a cautious cut, where they refrain from committing to any further easing for now.” According to Zief, with the euro area economic rebound underway and the disinflation path somewhat uncertain, the ECB has little incentive to hasten or pre-commit pledges.
In addition to the June meeting, there are four more monetary policy meetings scheduled this year, one each in July, September, October and December 2024.