ECB to cut rates in June, but economists split on risk around timing: Reuters poll

By Thomson Reuters Feb 29, 2024 | 5:25 AM

By Prerana Bhat

BENGALURU (Reuters) – The European Central Bank will first cut interest rates in June, according to a near two-thirds majority of economists in a Reuters poll, though they were split on the chances of the cut coming earlier or later than they expected.

Inflation, which the ECB targets at 2.0%, moderated to 2.8% in January from a peak of 10.6% in October 2022 and is expected to drop further. But policymakers have made clear they are not yet ready to consider cutting rates, even as growth falters.

Most members of the Governing Council, including President Christine Lagarde, are aligned with the view that more data, especially on the labour market, will be required before cutting the deposit rate from a record high 4.00%.

Last week, Lagarde said negotiated wage data from Q1, due in May, will be especially important for the ECB. That makes June the most likely month to consider a first rate cut, an expectation shared by markets and economists.

A near two-thirds majority of forecasters, 46 of 73, said the central bank will first reduce the deposit rate by 25 basis points to 3.75% in June. That consensus view has grown considerably stronger from around 45% in a January poll.

“Why June? Because by then actual inflation will have come down a little bit more, we will also have the first quarter wage growth which should also show at least no new acceleration … So it more or less looks like a good moment to do the first rate cut,” Carsten Brzeski, global head of macro at ING, said.

Only 17 expected an April cut and 10 said the ECB would wait until the second half of this year. None of the 73 economists in the Feb. 26-29 poll expected a rate cut at the March 7 meeting.

Still, economists said it would not be the start of a substantial easing cycle. Medians showed 100 basis points of cuts this year, taking the deposit rate to 3.00% by end-2024, broadly in line with market pricing. While 32 of 73 economists saw the rate higher than that, 23 predicted it would be lower.

“There is always a risk that as soon as the economy recovers just a tiny bit, inflation will come back so that argues against aggressive rate cuts,” added ING’s Brzeski.

Despite a strong consensus around the first rate cut, economists were divided on the risks around their forecasts. When asked what was more likely around the timing of the first reduction, a roughly 55% majority of respondents, 17 of 31, said earlier than they expect. The rest said later.

An early cut by the ECB could mean a weaker euro and risks of additional imported inflation as a similar Reuters poll found the U.S. Federal Reserve is also expected to reduce rates in June, with a significant risk of a later move.

But unlike in the euro zone, growth in the world’s No. 1 economy remains resilient and U.S. recession fears are fast fading.

“One of the transmission channels is the impact on EUR/USD when policies diverge,” Bas van Geffen, senior macro strategist at Rabobank, said.

“That does not necessarily prevent the ECB from making the first cut before their U.S. peers do. However, if the ECB is the first to cut, we would expect them to be a bit more cautious with their next steps.”

Inflation will average 2.3% in 2024 and 2.1% in 2025, according to the poll. Official preliminary data due Friday is expected to show prices rose 2.5% this month.

Economic growth in the 20-country bloc was seen at 0.1% and 0.2% in Q1 and Q2, respectively, and average 0.5% this year and 1.3% next.

(For other stories from the Reuters global economic poll:)

(Reporting by Prerana Bhat; Polling by Sujith Pai and Rahul Trivedi; Editing by Ross Finley, Jonathan Cable)