Interest rate cuts this spring 'regardless of what ECB says'

Leading mortgage broker Michael Dowling says rate cuts next year will bring relief for many Irish households and businesses

President of the European Central Bank Christine Lagarde: 'Should we lower our guard? We ask ourselves that question. No we should absolutely not lower our guard.'

The European Central Bank president Christine Lagarde unveiled new lower inflation forecasts, but continued to push back against financial markets that are betting the ECB will start cutting interest rates as early as March, and then be forced to announce further major reductions by the end of 2024.   

Speaking after a gathering of ECB central bankers in Frankfurt, Ms Lagarde said the central bank was set to bring eurozone inflation back under control by 2025, but only if rates at their current levels were "maintained for a sufficiently long duration". 

"Should we lower our guard? We ask ourselves that question. No we should absolutely not lower our guard," Ms Lagarde told reporters, saying rate cuts were not discussed at all at Thursday's gathering. 

However, economists predict the ECB will face tough going in holding that narrative into next year, and some observers warn the bank could do more harm than good by maintaining rates at elevated levels, noting the fall-out for commercial construction and manufacturing in recent months.  

Pressure on the ECB has also increased since Wednesday night, when the chief of the Federal Reserve openly discussed the potential for US rate cuts next year. The Bank of England, however, joined the ECB on Thursday in turning its back against early UK rate cuts. 

Economist Austin Hughes said the ECB will be cutting rates next year "regardless of what Ms Lagarde said" on Thursday. "They will likely be first cutting in the spring and then announce two or three more cuts of quarter point reductions by the end of the year," Mr Hughes said. 

The cuts will be smaller and at a slower pace than the markets expect, however, he predicted. Financial markets expect ECB rates will end next year 1.5% lower from the current level, with a 70% chance of a first cut of a quarter point in March. 

Andrew Kennigham, chief Europe economist at Capital Economics, predicted the first ECB rate will come in April. "We think inflation is likely to be quite a lot lower than the ECB’s new forecasts next year and are now forecasting five 25 basis point [quarter point] rate cuts from the ECB beginning in April, which is a little less than the six or seven cuts priced in by financial market," he said.   

On Thursday, European shares pared some large gains. Shares in the rate-sensitive property giants rose, but Irish bank shares fell on the prospects their earnings growth would slow on lower rates. 

Michael Dowling, a leading mortgage broker, said rate cuts next year will bring relief for many Irish households and businesses. A 1% reduction next year would take €175 off the monthly repayment from a typical first-time buyer mortgage of €300,000, he said.   

Ms Lagarde said the ECB now predicts eurozone inflation will approach its 2% target by 2025, compared with average rates of 5.4% predicted this year and for 2.4% in 2024. She said the inflation forecasts were lower than its previous outlook. 

Interest rates were dampening demand, economic activity will remain subdued in the short term before growth picks up, but the ECB was not forecasting a recession in the eurozone, Ms Lagarde said. The eurozone economy will expand 0.6% this year, grow by 0.8% in 2024, and then expand by 1.5% in each of the following two years, according to ECB projections.