A survey shows that economists’ expectations of the European Central Bank to cut interest rates after it starts to cut interest rates next week have decreased.
Respondents expect that the deposit interest rate (currently 4%) will be lowered by 25 basis points for the first time next week. This is one step less than their forecast before the management Committee last formulated the policy in April.
Since then, officials, led by European Central Bank President Lagarde, have strengthened their expectations of interest rate cuts in June, when the European Central Bank will cut interest rates before the Federal Reserve and the Bank of England. However, the unexpected strong rebound of the European economy, the high wage pressure and the upward risk to the already uncertain inflation outlook have intensified the debate on the follow-up measures.
Hawks such as Isabel Schnabel, a member of the Executive Committee of the European Central Bank, and Joachim Nagel, governor of the German central bank, hope to wait until September to consider the second action. Analysts believe that the Fed’s hesitation will limit the ECB’s room for manoeuvre.
Communicating the intention of the European Central Bank without locking in the specific situation may once again become the biggest challenge facing Lagarde.
Hugo Le Damany, an economist at AXA Investment Management Company, said: "It is difficult to explain why they are so convinced that now is the right time to cut interest rates, and at the same time they do not provide guidance for further interest rate cuts." He predicted that the European Central Bank would stop the monetary easing policy in June next year, and only need to cut interest rates five times, and the deposit interest rate would remain at 2.75%.
Respondents still believe that inflation is the biggest risk facing the euro zone economy, followed by the US presidential election and geopolitical tensions.
Risks faced by the euro zone economy
Inflation may accelerate in May after two months, reaching 2.4%. In essence, wage growth unexpectedly did not slow down in early 2024, which increased the pressure on service prices, and service prices continued to rise at a rate of nearly 4%.
In this environment, three-quarters of the respondents do not expect the ECB to provide any guidance from one policy meeting to the next, especially because officials have promised to pay special attention to quarterly economic forecasts.
About 84% economists said that such concern made it more likely to raise interest rates every three months, but 92% economists said that this did not rule out the possibility of raising interest rates between these two months. Villeroi, governor of the French central bank? Francois Villeroy de Galhau warned against underestimating the possibility of another interest rate cut in July, which highlighted this possibility.
This time, except for raising the expectation of economic expansion in 2024 after the economic growth in the first quarter was better than expected, the respondents did not expect the ECB to adjust its forecast.
Economists expect the economic outlook to remain basically unchanged.
Fabio Balboni, an economist at HSBC, said: "We expect that there will be differences between doves and hawks in the Committee. The former is keen to remove all policy restrictions, while the latter wants to be cautious until they are convinced that inflation is under control."
"This may make it difficult for the ECB to provide any guidance on the interest rate trend after this meeting, which may cause uncertainty and volatility in the market," he said.
Traders have recently reduced their bets on the number of interest rate cuts by the European Central Bank this year. They have now fully priced two interest rate cuts and a third of the chances of a third rate cut. In contrast, the United States has only cut interest rates once, and the chances of a second rate cut are 20%.
David Powell, a senior economist in the euro zone of Bloomberg, said, "The members of the management committee were not surprised by the situation in June, and even hawks said that they were likely to cut interest rates. President Lagarde is unlikely to make it clear that she will take another action in July, but she may gently agree to take more actions in September. We expect to cut interest rates by 25 basis points in June. After suspending interest rate cuts in July, there will be similar interest rate cuts in September, October and December. "
Although the inflation on both sides of the Atlantic (600558) has greatly cooled down, the progress of the decline has slowed down. This has led to comments that the cost of borrowing in the United States may need to remain high for a longer period of time, and speculation about what this means for Europe.
Nearly three-quarters of the respondents said that the euro zone has its own inflation dynamics, not just lagging behind the United States. However, only 6% people think that the ECB can completely leave the Fed in setting interest rates.
About 85% people think that if the Federal Reserve delays easing monetary policy, the European Central Bank will have to keep higher interest rates to cope with the inflationary pressure brought by the weak euro. Most economists believe that if the Fed stays put, the ECB can only cut interest rates three times.
Andrzej Szczepaniak of Nomura Securities said that in fact, Europe may be showing a similar trend to those factors that prevent the Fed from loosening monetary policy.
"In view of stronger economic activity data, flexible demand, encouraging job market, stronger-than-expected salary growth and high inflation in service industry, we believe that the ECB will only cut interest rates gradually in the end to maintain a certain degree of monetary restrictions," he said. "Cutting too much and too fast will unnecessarily ignite the embers of inflation and make the hard battle of the European Central Bank go to waste."