FRANKFURT – The European Central Bank is widely expected to cut its main interest rates by 25 basis points on Thursday, but what is to follow remains contentious.
The bank’s governing council is anticipated to announce the quarter-point cuts after two days of deliberations set to begin Wednesday, and such a move would take the lender’s deposit rate to 4.25% and is unlikely to be its last reduction. A decrease would also put the ECB a step ahead of the US Federal Reserve, which many observers say is unlikely to start its own cycle of post-pandemic rate cuts until after the summer.
The Eurozone economy has been sending rate-cut signals in the form of weaker inflation and flagging business activity for most of this year and much of late 2023, but the latest reports have since bucked the trend. May’s annual headline and core measures of consumer price growth in grew a surprise two-tenths of a percentage point to 2.6% and 2.8% respectively, according to preliminary data, which compares to an ECB inflation target of 2% over the medium term. Additionally, better-than-expected GDP expansion in the first quarter has been followed by improved projections for the single currency area, easing pressure on policymakers to cut rates.
“We have raised our euro area 2024 GDP forecast by half a point to an above-consensus 0.9%, mostly on the back of trade,” Deutsche Bank wrote, adding that it has maintained its 2025 forecast at 1.5%.
The German private lender added that its inflation outlook is broadly unchanged: “Sticky and with upside risks in 2024, converging to target in 2025 – but the composition is a little less ECB friendly with higher services and lower core goods inflation.”
Adjustment time
The combination of predictions has led Deutsche Bank to make “some slight hawkish tweaks” to its ECB forecast. “Our baseline is three quarter-point rate cuts by the ECB in 2024,” it said in a note. “The risk is two cuts.”
The German lender noted that it previously projected an ECB terminal rate of 2% in final quarter of 2026. “We now describe the landing zone as 2.00-2.50%. Either way, we see market pricing in 2025 as too hawkish. Declining inflation, fiscal tightening, and trade and geopolitical uncertainty all lean towards a larger easing of monetary policy.”
Canada’s TD Securities also predicted a hike this week, with more to follow: “The ECB will be the first of the G3 central banks to commence its rate cut cycle this week. However, we believe that markets are well priced for a hawkish scenario. The front-end is currently pricing around 60bps in cuts for 2024. This compares to around 90bps following the April meeting.
“We doubt that the ECB will sound overly hawkish at the upcoming meeting. This in particular holds as the governing council is still likely to forecast headline inflation to remain below target by 2026. To us, the June cut is not one and done. It will be a sequence of quarterly rate cuts from the ECB to get policy eventually closer to the neutral of 2.00-2.50%.”
Capital Economics said policymakers will drop rates at a much faster pace: “We still think the disinflation process is broadly on track, so we forecast a total of four 25bp rate cuts this year, which would bring the deposit rate down to 3.0% by December.”
New staff forecasts are also due Thursday, with a number of analysts predicting little change to the previous numbers. “The updated June staff projections are expected to suggest that the prevailing economic and monetary policy narrative stays broadly unchanged,” Danske Bank wrote. “We expect the rate cut to be formulated as a rollback of the ‘insurance hike’ from September last year.”
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- Market expects 25bp reduction across the board
- Surprise rebound in inflation stokes concerns
- Traders seek more guidance on path ahead
- Rate decision due Thursday at 12:15 GMT / 14:15 CET
- Press conference set for 12:45 GMT / 14:45 CET
By Eric Culp
European Editor, LiveSquawk News
@EricCulpLS
4 June 2024 | 19:30 GMT
FRANKFURT – The European Central Bank is widely expected to cut its main interest rates by 25 basis points on Thursday, but what is to follow remains contentious.
The bank’s governing council is anticipated to announce the quarter-point cuts after two days of deliberations set to begin Wednesday, and such a move would take the lender’s deposit rate to 4.25% and is unlikely to be its last reduction. A decrease would also put the ECB a step ahead of the US Federal Reserve, which many observers say is unlikely to start its own cycle of post-pandemic rate cuts until after the summer.
The Eurozone economy has been sending rate-cut signals in the form of weaker inflation and flagging business activity for most of this year and much of late 2023, but the latest reports have since bucked the trend. May’s annual headline and core measures of consumer price growth in grew a surprise two-tenths of a percentage point to 2.6% and 2.8% respectively, according to preliminary data, which compares to an ECB inflation target of 2% over the medium term. Additionally, better-than-expected GDP expansion in the first quarter has been followed by improved projections for the single currency area, easing pressure on policymakers to cut rates.
“We have raised our euro area 2024 GDP forecast by half a point to an above-consensus 0.9%, mostly on the back of trade,” Deutsche Bank wrote, adding that it has maintained its 2025 forecast at 1.5%.
The German private lender added that its inflation outlook is broadly unchanged: “Sticky and with upside risks in 2024, converging to target in 2025 – but the composition is a little less ECB friendly with higher services and lower core goods inflation.”
Adjustment time
The combination of predictions has led Deutsche Bank to make “some slight hawkish tweaks” to its ECB forecast. “Our baseline is three quarter-point rate cuts by the ECB in 2024,” it said in a note. “The risk is two cuts.”
The German lender noted that it previously projected an ECB terminal rate of 2% in final quarter of 2026. “We now describe the landing zone as 2.00-2.50%. Either way, we see market pricing in 2025 as too hawkish. Declining inflation, fiscal tightening, and trade and geopolitical uncertainty all lean towards a larger easing of monetary policy.”
Canada’s TD Securities also predicted a hike this week, with more to follow: “The ECB will be the first of the G3 central banks to commence its rate cut cycle this week. However, we believe that markets are well priced for a hawkish scenario. The front-end is currently pricing around 60bps in cuts for 2024. This compares to around 90bps following the April meeting.
“We doubt that the ECB will sound overly hawkish at the upcoming meeting. This in particular holds as the governing council is still likely to forecast headline inflation to remain below target by 2026. To us, the June cut is not one and done. It will be a sequence of quarterly rate cuts from the ECB to get policy eventually closer to the neutral of 2.00-2.50%.”
Capital Economics said policymakers will drop rates at a much faster pace: “We still think the disinflation process is broadly on track, so we forecast a total of four 25bp rate cuts this year, which would bring the deposit rate down to 3.0% by December.”
New staff forecasts are also due Thursday, with a number of analysts predicting little change to the previous numbers. “The updated June staff projections are expected to suggest that the prevailing economic and monetary policy narrative stays broadly unchanged,” Danske Bank wrote. “We expect the rate cut to be formulated as a rollback of the ‘insurance hike’ from September last year.”
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