FRANKFURT – Inflation continues to fall in the Eurozone, but the pace of the decrease is unlikely enough to spur the European Central Bank into cutting interest rates before summer, according to economists and market participants.
Following this week’s two-day governing council meeting ending Thursday, the ECB is expected to announce no change in current interest rates, according to economists and traders in the index swap market. Both groups are pointing to June as the first rate cut in the expected reduction cycle.
Some analysts had anticipated the first step-down as early as next month, a forecast they jettisoned following the release of last month’s preliminary inflation data for the Eurozone.
Sure, the headline annual rate for the currency area eased for the second straight month in February with a drop to 2.6%, but that mark was a tenth short of the estimate. The annual core rate declined for the seven straight time in February, but it held above 3.0%, namely at 3.1% when the market expected it to fall to 2.9% from 3.3% in January.
This left both above the ECB target, which is 2% over the medium term.
More disinflation (woe to they who would utter “deflation”) came in the January report for Eurozone producer prices, which showed a drop of 8.6% on the year according to the EU statistics office Eurostat.
A midsummer’s dream?
It looks like the die is cast. Following the latest consumer inflation report, Capital Economics pushed its prediction for the first lower euro-area borrowing costs this year from April to June. “Most policymakers at the ECB have stuck to the view that they need more time to be convinced that inflation will fall sustainably to 2%,” economist Jack Allen-Reynolds wrote. “February’s inflation data will have strengthened that conviction. So an interest rate cut in April – as we have been forecasting – is now not going to happen.”
What a difference a month makes, noted ING. “Going into the March ECB meeting, the market has taken a more cautious stance towards expected easing from the central bank. In early February, the market had fully discounted two cuts by June. Now, it is not even fully discounting a first cut in June – although with 22 basis points priced, it still remains the base case.” Analysts noted that the market expects slightly more than 90bp of easing for the year. “In early February, it was looking at closer to 150bp.
“In sum, it has come off its aggressive pricing and is now not too far from what our economists are expecting from the ECB – a first cut in June with 75bp of easing delivered in total this year.”
As rate-cut optimists scrambled to reassess and reforecast following the inflation report, some of the more pessimistic analysts saw reason to bring forward their timetable for lower borrowing rates in the Eurozone. “In recent weeks, data and central bank speakers have pushed markets to scale back the rate cut expectations materially, both in the euro area and the US,” wrote Anatoli Annenkov at Societe Generale. “Moreover, with wage data lagging in Europe and many ECB policymakers making it clear they want to see a further deceleration in wage growth in Q1, the June meeting is increasingly in focus for discussing rate cuts. With our latest inflation forecasts showing rising confidence in meeting the target next year, we move our expected first rate cut from September to June.”
Updated economic projections to show slower price growth
Nordea said the ECB meeting “is likely to feature another round of downward inflation forecasts, but given the ECB’s willingness to wait for more labour market data, the main message is set to point to a baseline of a first cut in the summer.
“In December, the ECB staff revised its projections downwards, but by a lesser magnitude than we had expected, and we now assume that staff will have to again revise down both the GDP and inflation forecasts in the March round.”
According to the Swedish bank, on Thursday the ECB will cut its 2024 growth forecast to 0.6% from the 0.8% announced in December. The outlook for the headline annual inflation rate for this year is to fall to 2.3% from December’s 2.7%, and the core rate will be shaved to 2.5% from the 2.7% projection, Nordea predicted.
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- Remaining price growth breeds caution amongst policymakers
- Concerns of economic weakness ease
- Analysts, markets focus on June
- Rate decision due Thursday at 13:15 GMT / 14:15 CET
- Press conference set for 13:45 GMT / 14:45 CET
By Eric Culp
European Editor, LiveSquawk News
@EricCulpLS
5 February 2024 | 16:30 GMT
FRANKFURT – Inflation continues to fall in the Eurozone, but the pace of the decrease is unlikely enough to spur the European Central Bank into cutting interest rates before summer, according to economists and market participants.
Following this week’s two-day governing council meeting ending Thursday, the ECB is expected to announce no change in current interest rates, according to economists and traders in the index swap market. Both groups are pointing to June as the first rate cut in the expected reduction cycle.
Some analysts had anticipated the first step-down as early as next month, a forecast they jettisoned following the release of last month’s preliminary inflation data for the Eurozone.
Sure, the headline annual rate for the currency area eased for the second straight month in February with a drop to 2.6%, but that mark was a tenth short of the estimate. The annual core rate declined for the seven straight time in February, but it held above 3.0%, namely at 3.1% when the market expected it to fall to 2.9% from 3.3% in January.
This left both above the ECB target, which is 2% over the medium term.
More disinflation (woe to they who would utter “deflation”) came in the January report for Eurozone producer prices, which showed a drop of 8.6% on the year according to the EU statistics office Eurostat.
A midsummer’s dream?
It looks like the die is cast. Following the latest consumer inflation report, Capital Economics pushed its prediction for the first lower euro-area borrowing costs this year from April to June. “Most policymakers at the ECB have stuck to the view that they need more time to be convinced that inflation will fall sustainably to 2%,” economist Jack Allen-Reynolds wrote. “February’s inflation data will have strengthened that conviction. So an interest rate cut in April – as we have been forecasting – is now not going to happen.”
What a difference a month makes, noted ING. “Going into the March ECB meeting, the market has taken a more cautious stance towards expected easing from the central bank. In early February, the market had fully discounted two cuts by June. Now, it is not even fully discounting a first cut in June – although with 22 basis points priced, it still remains the base case.” Analysts noted that the market expects slightly more than 90bp of easing for the year. “In early February, it was looking at closer to 150bp.
“In sum, it has come off its aggressive pricing and is now not too far from what our economists are expecting from the ECB – a first cut in June with 75bp of easing delivered in total this year.”
As rate-cut optimists scrambled to reassess and reforecast following the inflation report, some of the more pessimistic analysts saw reason to bring forward their timetable for lower borrowing rates in the Eurozone. “In recent weeks, data and central bank speakers have pushed markets to scale back the rate cut expectations materially, both in the euro area and the US,” wrote Anatoli Annenkov at Societe Generale. “Moreover, with wage data lagging in Europe and many ECB policymakers making it clear they want to see a further deceleration in wage growth in Q1, the June meeting is increasingly in focus for discussing rate cuts. With our latest inflation forecasts showing rising confidence in meeting the target next year, we move our expected first rate cut from September to June.”
Updated economic projections to show slower price growth
Nordea said the ECB meeting “is likely to feature another round of downward inflation forecasts, but given the ECB’s willingness to wait for more labour market data, the main message is set to point to a baseline of a first cut in the summer.
“In December, the ECB staff revised its projections downwards, but by a lesser magnitude than we had expected, and we now assume that staff will have to again revise down both the GDP and inflation forecasts in the March round.”
According to the Swedish bank, on Thursday the ECB will cut its 2024 growth forecast to 0.6% from the 0.8% announced in December. The outlook for the headline annual inflation rate for this year is to fall to 2.3% from December’s 2.7%, and the core rate will be shaved to 2.5% from the 2.7% projection, Nordea predicted.