ECB to go slow on rate cuts as elections feed risks, survey shows
Only one of the 29 polled expects officials to tweak their quantitative-tightening plans
THE European Central Bank (ECB) is expected to take a measured approach to lowering interest rates, a Bloomberg survey of analysts showed.
This comes amid political upheaval across the US and Europe which poses risks to inflation rate’s return to 2 per cent.
After an initial quarter-point reduction in June, respondents expect officials to take a timeout on interest rate cuts when they meet next Thursday (Jul 18) in Frankfurt.
Cuts are expected to resume again in September – arriving once every quarter until the deposit rate reaches 2.5 per cent a year later.
The gradual reversal of unprecedented monetary tightening reflects rising difficulty in assessing the economic pitfalls ahead for the 20-nation eurozone.
Inflation pressures remain strong, and the recovery from months of stagnation may already be fizzling out.
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Meanwhile, political factors are casting an ever-longer shadow on potential interest rate cuts. Elections – especially across the Atlantic – are forcing investors to re-think everything from government spending to trade.
Analysts now rank the US presidential election in November and the threat of another term for Donald Trump as the biggest danger to Europe’s economy.
The threat posed by Trump is compounded by confusion among the public over whether he will face President Joe Biden or another Democratic candidate.
In France, turmoil has stirred memories of the sovereign debt crisis in Europe in the previous decade. Snap French elections have also rattled investors, even if the situation has stabilised since the initial shock.
Faced with such uncertainty, officials led by ECB president Christine Lagarde are not pre-committing to a path for rates, pledging to decide as data arrive.
No pre-commitment to rate paths for the ECB
The ECB chief economist, Philip Lane, is among those saying that July mainly provides an opportunity for the central bank to take stock.
Markets – even more circumspect than economists – are only pricing one more reduction in the deposit rate this year, though leaning towards another cut.
“There’s simply no urgency to continue cutting rates at the current juncture,” said Carsten Brzeski, the head of macro at banking and financial services company ING.
“Therefore, the ECB will finally stick to its data-dependency approach and will – and should – refrain from giving any forward guidance,” he added.
“The next meeting on Jul 18 will be closely watched by investors to fine tune their expectations for the timing of the next rate reduction, even though it’s almost certain to leave rates unchanged this month. Lagarde is likely to hint at another move in September, without being too committal.”
The vast majority of analysts says the ECB will not shift course as a result of events there.
Only one of the 29 polled expects officials to tweak their quantitative-tightening plans. Just two see the central bank tilting remaining reinvestments towards France.
Only one respondent says the programme will be activated in the next three months.
Worries about weaker than expected economic growth
In contrast, a significant number fret that economic growth could be weaker and inflation stronger than the ECB projected in June.
The cost of services – driven partly by wage gains that are expected to remain strong – are a particularly big concern.
“Service sector companies report that supply factors, not a lack of demand, are inhibiting them from increasing output,” said Andrzej Szczepaniak, senior European economist at Nomura.
“Hence, still acute labour shortages and resilient services demand risk keeping service-sector inflationary pressures elevated near and medium term.”
He expects the ECB meeting to be “uneventful”, with the focus on whether the central bank “tees up September for another cut”.
Some say that the growing chances of a reduction in borrowing costs by the US Federal Reserve could nudge its European counterpart in Frankfurt to act more rapidly.
“With Fed rhetoric shifting anew toward interest rate cuts as activity and labour market data appear to normalise from very robust levels, the ECB should put the resumption of cuts back in the table,” said Hlias Tsirigotakis, an economist at the National Bank of Greece.
However, nobody expects interest rates to be reduced next Thursday.
“Incoming data are noisy, and it will be uneasy for the governing council to reach a clear view of the extent of the rebound in terms of growth and the underlying trend in inflation,” said Sylvain Broyer.
“All this in an unsettled political landscape in Europe and nervous debt markets,” he added. BLOOMBERG
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