European Central Bank’s rate cut estimations divide experts

By Burhan Sansarlioglu

ISTANBUL (AA) – Expectations that the European Central Bank (ECB) may cut interest rates in April have plummeted, with now experts forecasting that the bank may start cuts in the near term, though they are torn when it comes to the exact timing, specifically between June and September.

Experts were confident that the ECB would leave interest rates unchanged at this week's meeting, however, they currently find themselves in a dilemma.

Nonetheless, they agreed that the bank may not cut its interest rates unless there is a serious economic recession.

The ECB needs more confidence in the inflation outlook before easing monetary policy, Bas van Geffen, a macro strategist at the Dutch financing firm Rabobank, told Anadolu.

“We are not unsympathetic to the view that the ECB may start cutting in June, but we maintain a slight preference for September,” he said.

“Wage dynamics need to improve visibly before we can fully subscribe to an earlier cut, specifically, if data on collective wage bargaining show a deceleration and no new shocks materialize, that would lead us to bring forward our rate cut expectations to June,” he added.

He said that attacks on ships in the Red Sea by Yemen’s Houthis introduced another uncertainty to the outlook. However, he added, there would be no changes to the policy stance at the January meeting.

However, Dirk Schumacher, head of European Macro Research at the France-based financing firm Natixis, told Anadolu, that the ECB may start its first interest rate cuts in June, albeit with at a loss of 25 base points.

Schumacher also added that bank’s conference in January may be of ordinary nature, as no important news may be released, and that the bank may highlight its data-driven approach.

“Owing to the time lag of the publication of wage data (and their volatility), it will be probably only in early Q2 that the ECB will be in a position to assess whether wage growth has moderated or not; but, of course, it is not only wage growth that matters for the ECB, (as) inflation data in the coming months will remain key for the ECB when assessing the appropriateness of its policy stance,” he said.

Schumacher pointed out that, “no doubt, (the ECB’s) President (Christine) Lagarde will be asked whether she would agree with the notion of a rate cut in the ‘summer,’ (and) it will be interesting to hear how much she will qualify any endorsement of this view.”

Peter Vanden Houte, chief economist at the Dutch banking firm ING Group, said that the ECB signaled the end of its interest rate hike cycle in December.

Houte underlined that the financial markets perceived this signal and the current economic weakness as clear signs of imminent interest rate cuts.

“Even if actual growth continues to turn out weaker than the ECB had expected, as long as the eurozone remains in de facto stagnation and doesn’t slide into a more severe recession, there is no reason for the ECB to ease monetary policy in the short run,” he said.

He asserted that “the job is not done yet for the ECB” when it comes to inflation.

“In the coming months, inflation developments will be determined by two opposing trends: more disinflation as a result of weak demand but also new inflationary pressures due to less favorable base effects, new inflationary pressure as a result of the tensions in the Middle East,” he added.

Houte said that the irony in current market pricing is that the need for interest rate cuts is becoming less urgent.

He said that financing conditions have eased since early December, “doing the work actual rate cuts should do, (which is) supporting growth but also pushing up inflation risks.”

“Consequently, the more aggressive the market prices in future rate cuts, the less needed and likely those cuts will be; therefore, the most likely outcome of next week’s ECB meeting will be no change at all,” he added.

He estimated that the bank will not make any changes at its January conference, noting that Lagarde may emphasize her commitment to the data dependency at the conference and provide some information about the potential conditions for interest rate cuts without making any commitments.

*Writing by Emir Yildirim