Survey: ECB will cut interest rates four times this year

However, ECB officials pour cold water on expectations for early rate cuts

ECB chief economist Philip Lane: Too early to talk about trimming borrowing costs

The European Central Bank will lower interest rates four times this year as inflation retreats more quickly than previously anticipated, according to a Bloomberg poll of economists. 

However, European shares and bonds retreated after ECB officials poured cold water on expectations for early rate cuts. 

According to the survey, the cuts, each of 25 basis points, or a quarter point, are expected to kick off in June, with further reductions in September, October and December bringing the deposit rate to 3%. While that’s one more move than expected in last month’s survey, it’s still more conservative than the six, starting April, that market investors are pricing in. 

The ECB is currently on hold as it waits to see how the 10 hikes enacted since mid-2022 affect the eurozone economy. Policymakers are focusing particularly on wage developments in the first half of 2024, to confirm that rising labour costs won’t keep inflation from decelerating to the 2% goal.

Economists now expect a faster retreat in price growth. They still see a bumpy path ahead as inflation re-accelerates from the target level in the fourth quarter to average 2.1% in 2025.

European shares and bonds retreated on Monday. The Stoxx Europe 600 index slipped 0.5% at the close, extending a lacklustre start to the year. Consumer goods and retailers led the decline after data showed Germany’s economy contracted for the first time since the pandemic last year. 

Lingering inflation and geopolitical risks will prevent the ECB from lowering interest rates this year, even though a recession can no longer be ruled out, according to ECB governing council member Robert Holzmann. He joined colleagues including ECB president Christine Lagarde, Constantinos Herodotu, and chief economist Philip Lane in warning that it’s too early to talk about trimming borrowing costs.

Germany on Monday reported a contraction of 0.3% in the fourth quarter and a decline in output of the same magnitude for the whole of 2023. Even so, Bundesbank president Joachim Nagel agreed that it’s premature to discuss monetary easing, suggesting no movement before the summer.

“We’re now getting at the stage when bad economic news no longer translates into good news for equity markets,” said Benoit Péloille, chief investment officer at Natixis Wealth Management. In the US as well, market pricing for as many as six quarter-point rate cuts “can be a stretch; bad economic news will start to hurt,” he said. 

Such a scenario is in line with warnings from ECB officials, who’ve said last year’s dramatic slowdown in price inflation won’t continue in 2024, partly because governments are phasing out aid meant to tackle the high cost of living.

The core rate of inflation, which strips out volatile components including energy and food, is now seen lower this year, but slightly higher in 2025, remaining above the ECB’s goal at 2.2%.

A recession in the second half of 2023 is set to be followed by a gradual recovery that may gather speed over the course of this year, according to the survey. Eurostat data showed industrial production fell 0.3% in November. 

Bloomberg