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Strong economic data and official statements drive European Central Bank who support tight monetary policy, some analysts and investors are hesitating in their expectations for a cut interest rates current year.
While the majority of economists still expect quarterly cuts after the first planned cut this week, some believe that inflationThe continued rise, rapid wage growth, and surprisingly strong output in the euro area will constrain monetary policy easing.
Speculators also reduced bets on facilitating monetary policy, with the support of Executive Board member Isabel Schnabel and German Central Bank President Joachim Nagel, who will apparently abandon the idea at next July’s meeting, as Austrian Central Bank President Robert Holzmann said that two cuts during 2024 may be sufficient.
The pace of reduction
Cautious officials fear that lowering borrowing costs at successive meetings will prompt markets to regard this pace as the benchmark. They may be less confident than some of their colleagues that ECB policy can actually differ from US Federal Reserve Bank, which will likely keep its monetary policy unchanged for a period of time.
“We have been relatively aggressive with our expectations since last year of making only three cuts this year at 25 basis points each, but the risk of these expectations remains undoubtedly in smaller cuts,” explained Dennis Shin, an economist at Scope Ratings. Interest rates and nothing more.
He added that the ECB would “logically want to avoid the mistake of cutting too aggressively during this final phase of its approach.”
The latest economic reports provide reasons for this caution. A key wage measure failed Euro-zone. In moderation, at a time when monetary policy makers were hoping that inflation would appear to have finally been brought under control, indicating that price pressures, especially in the services sector, need longer to ease. Realistically, inflation rose from 2.4% during April to 2.6% last month, exceeding expectations.
In the meantime, he rebounded Eurozone economy. In a greater way than expected, after experiencing a limited recession during the latter half of last year, with the labor market remaining strong, the unemployment rate recently reaching its lowest levels in history, and company opinion surveys revealing signs of the beginning of the recovery of faltering manufacturing companies.
June meeting
No one expects that monetary policy makers will abandon reducing interest rates during the current June meeting, which will reduce the interest rate on deposits from the record 4% it reached 9 months ago. Consumer price increases should ease back in the coming months.
However, economists expect smaller cuts this year. Almost half of the participants in a Bloomberg opinion poll conducted before the European Central Bank meeting last April expected 4 or 5 interest rate cuts during 2024. No one expects 5 cuts anymore, and the percentage of participants who expect 4 cuts has declined.
In the same way, the markets – after expecting three cuts to interest rates for the current year recently during last April – have currently ruled out cuts during next July, and have placed the possibility of a reduction next September at 60%.
“We believe the ECB will increase its quarterly inflation forecasts after their review, creating difficult conditions for cuts,” Gabriel Foa, portfolio manager at Algebris Investments, noted to clients via email. He added: “The markets have almost completely ruled out a reduction next July, and currently only expect a total of two reductions by the end of the current year. As things stand, we believe that the European Central Bank’s rate cut this week may quickly be seen as a monetary policy error.”
December meeting
Piet Christiansen of Danske Bank and Mariano Valderrama, an economist at Intermoney in Madrid, were among those who do not expect a second cut until late next December, according to a recent Bloomberg poll.
“We doubt there will be a reduction next September,” Valderrama said. He attributed this to labor market factors, wages, and rapid economic growth. He continued, “In addition, fiscal policy will not become less stringent this year.”
Others, such as Gebhard Stadler of Bayerische Landesbank, expect a temporary halt in the last month of the current year, after only two cuts.
He continued: “Core inflation will prove more difficult to control than the ECB has so far anticipated given continued and strong wage growth and strong profit margin trends. In addition, there is enormous uncertainty arising from the US elections, as well as matters related to trade and exchange rate policies.” Euro and US dollar.
The US Federal Reserve has indicated that it may be necessary to keep interest rates high for longer to ensure inflation returns to 2%, raising questions about how far the European Central Bank can venture on its own. The President of the European Central Bank confirms Christine Lagarde. She and her colleagues say they are in no hurry to reduce borrowing costs, although they are on their way to lowering interest rates.
The tightening continues
Chief economist Philip Lane said that monetary policy will remain tight throughout 2024, committing to making his decisions according to the data issued as soon as it is issued. Despite the insistence on a meeting-by-meeting decision-making approach, some fellow officials have given some signs of a somewhat more critical tightening.
For Schnabel, concerns about early easing of monetary policy indicate that there is no need for a second cut next July, while Nagel stated that “if” the European Central Bank cuts interest rates this June, it will have to “wait until next September” to do so again. Holzman stressed that he will not support further cuts if they are not justified simply because he is “willing to support one cut.”
“In the past, the first rate cut was always followed by additional rate cuts to support growth, respond to a crisis, or both,” said Carsten Brzeski, head of macroeconomics at ING. “This time, though, there is neither.” Therefore, there is a serious risk that the European Central Bank will be forced to move from the state of “one reduction is not enough” to the state of “continuing to reduce again and again until the goal” of controlling inflation is achieved.
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