ECB surveys likely cement case for June rate cut but path to further steep cuts much less clear  

ECB data confirm bank lending stagnated across the eurozone, helping the case for a summer rate cut.

Eurozone lending continued to stagnate in March and consumers trimmed their inflation expectations as record-high borrowing costs kept putting the brakes on the eurozone's economy, European Central Bank reports showed. 

The data was likely to cement the ECB's plan to start cutting interest rates in June after seeing inflation fall to just above its 2% goal and economic growth come to a standstill. "Today's data is in line with a start to cautious rate cuts," Bert Colijn, senior economist for the eurozone at ING, said.

Bank credit figures illustrated how high rates were likely discouraging borrowers as well as lenders — part of the price to pay for the ECB's fight against high inflation.

Bank loans to companies increased by just 0.4% in March, compared with 0.3% a month earlier. Growth in lending to households, which had been more resilient until last summer, set a new decade-low at 0.2%, from 0.3% in February.

In a sign that the ECB's bitter medicine was working, an ECB survey showed consumers in March cut their inflation expectations for the following 12 months to their lowest since December 2021 at 3%. Inflation expectations for three years ahead held steady for a fourth consecutive month at 2.5%, the ECB said in its monthly poll of around 19,000 consumers. 

On the upside, the amount of money circulating in the eurozone — a measure that often works as a leading indicator — continued to rebound and grew by 0.9%, the fastest pace since last May. This chimed with some recent data pointing to tentative signs of recovery, or at least a stabilisation, in the economy.

Inflation has fallen quickly over the past year but the outlook remains clouded by rising energy costs, stubbornly high services inflation and continued geopolitical tensions that threaten to disrupt trade.

The focus remains on the ECB's meeting in June, and on whether the bank will follow with aggressive rate cuts in subsequent meetings through the rest of the year. Former policymaker Christian Noyer said on Friday that the ECB does not have to wait for the US Federal Reserve before cutting interest rates as the two can be out of sync for several quarters.

“It’s not unrealistic to believe that they move at different times even if the general movement will probably go in the same direction,” Mr Noyer said. A delay in Fed easing is proving a key topic for ECB officials as they debate how policy will evolve after likely cutting rates at their next meeting in early June. 

President Christine Lagarde has consistently said the ECB will be data-dependent, not Fed-dependent. Some policymakers have cautioned, however, that the longer there is a gap between the two, the greater the impact will be.

“The ECB is in charge of a large enough monetary union to be really independent on what they decide,” Mr Noyer added.

Speaking late on Thursday, ECB policymaker Fabio Panetta said: "From now on, we must weigh the risk of monetary policy becoming too tight." Mr Panetta said that "a tight monetary stance could...increase the risk of a protracted period of economic weakness". 

“But there can be a gap of some months or quarters depending on the circumstances of each economic or monetary zone,” he said. The Italian central bank chief said the eurozone economy needs fresh impetus from monetary-policy easing, which would also temper the risk of undershooting the 2% inflation target. 

A lack of loosening by the Federal Reserve should pose no obstacle to the ECB, he said. 

Reuters and Bloomberg