Doubts creep in over how quickly and how far ECB will cut rates

President of European Central Bank, Christine Lagarde did little last week to dampen market bets for a first rate cut in June.

Doubts about the path of future interest rate cuts are creeping into the thoughts of financial markets as two large bank forecasters predict the European Central Bank will be reluctant to move too quickly this year should its US counterpart be spooked by stubbornly high inflation. 

The ECB president Christine Lagarde did little at a key meeting of the bank in Frankfurt last week to dispel market bets that a first rate was coming in June. However, since then, figures showing stubbornly high levels of inflation in the US are seen weighing on decision-making at the US Federal Reserve, and in turn, are likely to influence the ECB on its path for future rate cuts beyond the June meeting, some economists have said.  

Deutsche Bank and Morgan Stanley now both trimmed their forecasts for ECB borrowing costs, predicting only three moves this year. “We are updating our ECB baseline to a more gradual – and uncertain — easing cycle,” Deutsche economists led by Mark Wall said in a research note. They previously anticipated five quarter-point cuts in 2024. “We retain the same baseline terminal rate, but three quarters later than in our previous view,” the Deutsche Bank economists said. 

Morgan Stanley economists altered their forecast to reflect US colleagues’ predictions for fewer moves by the US Federal Reserve. They previously expected four reductions for the eurozone this year. “While a certain level of decoupling between the Fed and ECB can occur, we think that it will be limited,” Morgan Stanley chief Europe economist Jens Eisenschmidt and colleagues wrote.

 “We think we will see a relatively similar profile between the Fed and the ECB, in particular during the first part of their respective cutting cycles,” they said. 

Tracker mortgages

Any slowdown in the pace of ECB rate cuts would have significant implications for the 179,000 tracker mortgage households in the Republic who would have anticipated significant cuts to their mortgage interest bills by the end of the year. 

Tracker holders have been in the firing line ever since the ECB started out on its campaign to raise official rates in July 2022. First-time buyers and 429,000 existing fixed-rate mortgage holders would also have been anticipating significant rate cuts by the end of the year. 

However, Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics, is sticking to projections the ECB will deliver sharp rate cuts this year and deliver more to bring its deposit rate down to 2% early next summer because rates are at restrictive levels. 

"The ECB looks set to cut rates in June, reducing the deposit rate from 4% to 3.75%, and we think it will follow that up with rate reductions at every remaining meeting this year," Mr Allen-Reynolds said in a commentary, called 'ECB rate cuts: when, how fast, and how far?'. 

"So while many forecasters expect the ECB to cut interest rates three or four times this year, we think that it will cut by 25 basis points at all five remaining meetings this year, and again in January because it will become increasingly difficult for policymakers to justify a very tight policy stance. That would take the deposit rate to 2.50% by January," he said.