Leading economists anticipate that the European Central Bank, like other central banks, is emphasising the need for further confidence. To avoid any resurgence in inflation, the ECB is broadly expected to keep the key banking rates on hold until June, several economists have told Delano ahead of the ECB’s policy-setting meeting this week. However, they remain open in their expectations by year-end.
Ruben Segura-Cayuela, head of Europe economics research at Bank of America, highlighted the prevalent focus on confidence among central banks, noting the ECB’s reluctance to signal the beginning of a rate-cutting cycle soon. Nonetheless, Segura-Cayuela anticipates the start of rate reductions from June 2024, explaining, “By June, we expect data to have sufficiently comforted the ECB that disinflation has legs,” forecasting 75 basis points in cuts for 2024 and a further 125bps in 2025. He also mentioned the possibility of an “earlier acceleration of the cutting cycle than we expect now,” potentially leading to up to 100bps in cuts for 2024, with the ECB deposit rates predicted to reach 2% by mid-2025.
Ulrike Kastens, senior economist for Europe at DWS, expects ECB president Christine Lagarde to reiterate her mantra of “being data-dependent rather than date-dependent” in the March meeting, and “the central bank is likely to cut the deposit rate for the first time by 25bps in June, followed by two more gradual cuts.” By the end of 2024, Kastens expects the deposit rate to fall by 75bps.
Matthew Russell, a fund manager in M&G Investments’ fixed income team, suggests that strong corporate earnings and a robust labour market diminish the chance of near-term ECB rate cuts. Given the inflation trend is decreasing but still above the 2% target, the ECB is likely to adopt a cautious approach until there are significant economic changes. “Holding rates steady is the sensible and most likely outcome [in the March meeting], until the facts change,” Russell notes.
Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, concurs with the expectation that the ECB will leave rates unchanged during its next policy-making meeting on Thursday 7 March, but anticipates a 70% probability of a 25bps cut by June.
George Buckley, chief UK and euro area economist at Nomura, and Andrzej Szczepaniak, senior European economist at Nomura, echo this cautious sentiment. They predict a 50% chance of a 25bps reduction in the June meeting. But at the same time, they note a nearly equal likelihood between holding and decreasing rates by 50bps, contingent on incoming data. Buckley and Szczepaniak believe that the ECB will begin loosening monetary policy this year due to a slowing inflation rate and modestly improving economic growth. “As soon as the ECB is comfortable that spring wage negotiations will be absorbed in firms’ profits rather than lead to a resurgence of inflation, the governing council will opt to cut rates,” the economist duo stated, anticipating a total of 125bps in rate cuts from June to December 2024.
Franck Dixmier, global CIO of fixed income at Allianz Global Investors, concurs with fellow economists, stating, “The current evolution of prices and wages suggests monetary policy will not change any time soon.” Despite an overall decrease in inflation, Dixmier points out that the core inflation is still stubbornly high. “Services inflation is the key factor to watch over the coming months,” Dixmier argued. With uncertainty surrounding wages, Dixmier noted, “We believe that the ECB could make its first rate cut in June once it has more information on wage trends at the start of the year.”
Anna Stupnytska, a global macroeconomist at Fidelity International, notes that “The ECB is facing a clear trade-off between growth and inflation, and the path for monetary policy looks less uncertain than for their counterparts, including the Fed.” The euro area economy is stagnating or contracting in places, while the disinflation process is well underway. Stupnytska predicts, “If wage growth shows broad-based signs of easing, the ECB should be ready to start the cutting cycle in June.”
François Cabau, a senior eurozone economist at Axa Investment Management, recalling the series of recent discussions and insights from various ECB officials, remarked, “The market has almost entirely priced out a March rate cut.” He then delved into the economic indicators and supporting data that make any immediate policy change complicated, further noting, “An April rate cut cannot be entirely ruled out, but we maintain our long-standing forecast of a 25bps rate cut in June, with a total of three expected this year.”
Dave Chappell, senior fund manager of fixed income at Columbia Threadneedle Investments, remarked, “Central bankers are calling for patience regarding monetary easing, after the strong rally in markets at the end of last year brought rate cut expectations forwards.” Taking note of wage negotiations and inflation trending lower, but not yet comfortably settled around the 2% target, “We currently expect the ECB to make its first rate move in June.”