The European Central Bank (ECB) has sent mixed signals in recent days on the prospect of interest rate cuts in 2024. While some policymakers see cuts as likely, others urge caution amid signs of economic resilience.
ECB Survey Points to Significant Rate Reductions
A survey published last week showed economists widely expect the ECB to cut rates four times this year, bringing the key deposit rate to 0.75% from 2% currently. The projections indicate the ECB could be more aggressive than the US Federal Reserve in easing policy to combat weak inflation.
The survey results follow repeated commitments from ECB officials in recent months to continue raising rates to dampen price pressures. However, inflation dropped faster than expected to 5.2% in December, its lowest level since February 2022. This has prompted speculation that rate cuts could come sooner. ECB chief economist Philip Lane said recently the central bank has room to recalibrate policy if high inflation risks recede further.
But Key Officials Urge Patience
In contrast to the survey findings, some prominent ECB officials have pushed back against expectations of swift rate reductions.
ECB Governing Council member Robert Holzmann said last week that policymakers should not count on cuts this year given continuing inflationary pressures. Fellow Austrian policymaker Gottfried Haber also signaled over the weekend that rate cuts are unlikely before the ECB’s customary summer break.
Additionally, Philip Lane said rate changes are not a topic “for the near term”. Joachim Nagel, Germany’s central bank president, concurred recently that discussing cuts now would be premature. The caution expressed by Lane and Nagel, two key voices on the Governing Council, suggests patience rather than urgency.
Economic Support Building for Eventual Cuts
In explaining the case for eventual rate reductions, ECB officials have cited mounting evidence of economic weakness. Isabel Schnabel, who leads banking supervision for the central bank, warned of a “very weak outlook in the near term” in remarks last week. Her colleague Mario Centeno echoed this sentiment, saying a recession is likely in 2023.
To underscore the weakening growth outlook, Lane recently marked June as the key meeting for assessing the “first stage” of rate adjustments. His timeline suggests the ECB could adopt an easing bias by mid-year if the current slowdown deepens. The central bank also has remaining bond holdings from quantitative easing purchases that will provide further stimulus when re-invested at lower rates.
Market Expectations Firm Despite Mixed Messages
While they have voiced reservations about near-term moves, the bank’s more hawkish members have not ruled out cuts before 2024 ends. Traders still largely expect policy to be eased before the Fed acts, reflecting the Eurozone’s weaker growth.
Eonia futures pricing indicates markets anticipate around a 50 basis point reduction by December. If delivered, this would be the most aggressive ECB easing since the pandemic emergency.
Table 1: Market Expectations for ECB Key Interest Rates
| Rate Decision Date | Deposit Rate Forecast | Refinancing Rate Forecast |
|---|---|---|
| Current Level | 2.00% | 2.50% |
| March 2024 | 1.75% | 2.25% |
| June 2024 | 1.50% | 2.00% |
| September 2024 | 1.25% | 1.75% |
| December 2024 | 1.50% | 2.00% |
Source: Eonia Futures Contracts, Bloomberg Terminal
Inflation Still the Key Driver
Ultimately, despite sending discordant rate signals lately, ECB policymakers agree the path of inflation will determine whether and when cuts are appropriate. New board member Bostjan Vasle stated cuts are possible this year if price stability returns, while Francois Villeroy de Galhau reiterated decisions will be “data dependent”.
The ECB’s primary mandate is maintaining price stability, defined as inflation below, but close to, 2% over the medium term. With Eurozone inflation still well above target and wage growth accelerating, the case for lowering rates remains doubtful for some officials absent a substantial growth shock.
Nonetheless, given the lags between policy adjustments and real economic impact, the ECB may need to open the door to cuts before outright deflation emerges. If demand slows further, markets seem justified in expecting easing ahead of the Federal Reserve, despite hawkish rhetoric from some Governing Council hawks.
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