ECB Seen Cutting Interest Rates Once A Quarter Starting In June

Economic

Central Bank

Summary:

Economists predict deposit rate will hit 2.25% at end of 2025.Geopolitics, US elections and inflation are biggest risks.

The European Central Bank will embark in June on a steady-yet-gradual path of interest-rate cuts that’ll run at least through the end of next year, according to economists surveyed by Bloomberg.

Respondents anticipate a first quarter-point reduction in the deposit rate — currently at a record 4% — at the policy meeting following the Governing Council’s upcoming session on April 11. Similar moves will ensue once a quarter, taking the rate to 2.25% by late 2025.

ECB Seen Cutting Interest Rates Once A Quarter Starting In June_1

Officials seem to have all but agreed that June is the month to start dialing back policy restriction. The subsequent pace of easing is less clear, with President Christine Lagarde insisting it’ll be strictly guided by economic performance — and others already busy plotting their preferred course.

“Since the beginning of rate cuts in the near future seems to be almost decided, attention will now shift to what determines the speed of monetary easing,” said Kristian Toedtmann, a Dekabank economist. “Council members do not seem to have a common understanding of data dependence.”

Greece’s Yannis Stournaras argued last month that two rate cuts before the summer and four total this year would be “reasonable” given the outlook. His Austrian colleague Robert Holzmann, long an advocate for not moving at all in 2024, said this week he has no “in-principle objection” to an initial June step — but only if the economy allows.

Some green shoots have emerged recently, hinting at accelerating growth momentum after the 20-nation bloc only narrowly avoided a recession in the second half of last year. Business confidence is improving as well.

ECB Seen Cutting Interest Rates Once A Quarter Starting In June_2

“The challenge for the ECB will be not to sound too hawkish,” said Carsten Brzeski, ING’s head of macro. “Instead, it will have to explain that a rate cut in June will not so much be the result of the ECB wanting to support the economy but rather a sign of ‘they simply can’ somewhat normalize the restrictive monetary-policy stance.”

That’s possible because inflation slowed more quickly than expected in March and consumer expectations of future gains also eased, suggesting the ECB is on track — if not ahead — in its efforts to reach 2% next year.

What Bloomberg Economics Says...

“We predict 25-basis-point cuts in June, September, October and December, leaving the deposit rate at 3% by year end. We think below-target inflation and dwindling domestic cost pressures will prompt a faster speed of easing after a pause in July.”

— David Powell, senior euro-area economist.

Most economists in the survey consider risks to the ECB’s latest projections — on growth and inflation — to be broadly balanced, though about a third see upside ones for the latter in 2025 and 2026.

ECB Seen Cutting Interest Rates Once A Quarter Starting In June_3

“The ECB should be open to rate cuts as early as June of this year but simultaneously signal to financial markets that overly aggressive rate-cut expectations are unwarranted and counter-productive,” said Dennis Shen, senior director at Scope Ratings, highlighting the risk of a premature loosening of financial conditions.

Markets are currently pricing around 90 basis points of easing this year, compared to about 70 basis points for the Federal Reserve. That gap has reignited a debate that’s as old as the ECB itself — whether Europe can chart its own policy course or will ultimately be forced to follow the US.

Only a quarter of respondents say they’re convinced that Fed decisions won’t impact the ECB’s rate path at all, compared to 36% saying they shouldn’t.

What’s true is that one of the single-biggest economic risks to the euro area is originating in the US in the form of presidential elections. Economists are similarly concerned about global geopolitical tensions and inflation pressures.

Source：Bloomberg

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