By Indradip Ghosh
BENGALURU (Reuters) – The European Central Bank will cut its deposit rate in June, three months earlier than an expected move by the U.S. Federal Reserve, and then twice more this year – less than previously thought, according to most economists polled by Reuters.
That outlook of a June cut was in line with recent ECB guidance, but while policymakers have made it clear there will likely be multiple cuts this year, they have been less clear on exactly how many.
The steeper fall in inflation in the euro zone than in the U.S. nevertheless backs up the view that the ECB is set to cut more than once.
An overwhelming majority, or 91 of 97 economists in the April 15-22 Reuters poll, expected the ECB to cut its deposit rate, currently 4.00%, to 3.75% in June, in line with market pricing.
“June seems like the starting point of a cutting cycle… Only a big disappointment on collective wage data which comes out in the middle of next month could derail a June cut – it’s very unlikely,” said Bas van Geffen, senior macro strategist at Rabobank.
“It’s also a bit of a feeling of how much easing they can get away with because there’s still some upside inflation risks and these risks are especially being amplified.”
Despite inflation easing to 2.4% in March, persistently high oil prices and elevated wage growth could derail the progress. It won’t slow down to the central bank’s 2% target until the third quarter of 2025, the poll showed.
Although ECB President Christine Lagarde stated after the April 11 monetary policy meeting that the central bank is “not Fed-dependent”, further weakening of the euro, which has already lost more than 3.5% against the dollar this year, could raise the prospect of more imported inflation.
More than an 80% majority, or 44 of 54 economists, said they agreed with Lagarde’s statement.
“Lagarde is technically right in saying the ECB is independent, but the ECB cannot ignore what is happening in the U.S.,” said Carsten Brzeski, global head of macro at ING.
“I would argue with recent market developments, a resurge in oil prices and the weakening of the currency, the idea of back-to-back rate cuts has become very unlikely. So I really think the ECB will do exactly what Lagarde said it will – be extremely data-dependent.”
After June, the central bank will cut the deposit rate twice more this year, according to just over half, or 52 of 97 economists. While seven expected a total of 50 basis points of rate cuts in 2024, 38 predicted 100 basis points of cuts or more.
In a March survey, a slight majority, 39 of 77 economists, expected a total of 100 basis points or more of reductions.
“Over the last few months we have had to gradually back out of a more aggressively dovish call on the ECB. The economy has been a bit more robust and inflation a bit stickier than we were expecting,” said Mark Wall, chief Europe economist at Deutsche Bank.
Still, the expected rate cuts were more than the two reductions expected from the Fed. The chances are rising the U.S. central bank holds rates throughout this year.
When asked about estimates for the ECB’s neutral rate – that neither stimulates nor restricts economic activity – the median of 35 responses was at 2.25%, in line with the recent comments from French central bank chief Francois Villeroy de Galhau.
Meanwhile, recent business surveys showed signs of an upturn in the bloc’s dominant services industry, which could encourage the ECB to go for fewer rate cuts.
Euro zone economic growth was seen at 0.2% this quarter and 0.3% in Q3, and at an average 0.5% this year and 1.3% next.
But Europe’s largest economy, Germany, was expected to only grow 0.1% in 2024, slower than the 0.3% predicted in January.
(For other stories from the Reuters global economic poll:)
