ECB rate-cut expectations start to unravel before first move

Some economists reckon sticky inflation, rapid wage growth, and surprisingly robust eurozone output will constrain monetary loosening

European Central Bank president Christine Lagarde. Inflation picked up to 2.6% last month from 2.4% in April — more than expected.

Strong economic data and vocal European Central Bank hawks are pushing some analysts and investors to waver in their expectations for interest-rate cuts this year.

While most economists still foresee quarterly reductions following this week’s initial move, some reckon sticky inflation, rapid wage growth and surprisingly robust eurozone output will constrain monetary loosening.

Traders, too, have pared easing bets, reinforced by executive board member Isabel Schnabel and Bundesbank president Joachim Nagel seeming to take July off the table, as Austria’s Robert Holzmann said two decreases in 2024 may suffice.

Cautious officials fret lowering borrowing costs at consecutive meetings could prompt markets to take that pace as their baseline. They may also have less confidence than some of their colleagues that ECB policy can truly diverge from the Federal Reserve, which is likely to stay on hold for a while yet.

“We’ve been comparatively hawkish with our expectations since last year of only three 25-basis-point cuts for this year, but the risk for these expectations remains decidedly for fewer rate cuts — not more,” said Dennis Shen, an economist at Scope Ratings. 

The ECB will reasonably want to avoid the mistake of cutting too aggressively during this last mile.

The latest economic reports offer grounds for wariness. A key gauge of eurozone pay  policymakers had hoped would show inflation had finally been conquered failed to moderate — indicating price pressures, particularly in the services sector, may take longer to ease. Indeed, inflation picked up to 2.6% last month from 2.4% in April — more than expected.

At the same time, the 20-nation economy bounced back more resoundingly than anticipated after the mild recession it suffered in the latter half of last year, with the labour market staying resilient, unemployment recently hitting an all-time low and business surveys even showing signs of life at struggling manufacturers.

No one sees policymakers reneging on June’s cut, which will trim the deposit rate from the record 4% it reached nine months ago. And the overall retreat in consumer-price gains should resume in the coming months.

Still, economists expect fewer moves this year. Almost half of respondents in a Bloomberg survey before the ECB’s April meeting anticipated four or five rate reductions in 2024. Nobody predicts five anymore, and the share that sees four has declined.

Bloomberg