Image: Arne Dedert (dpa)
According to a survey by the Reuters news agency, more and more economists are expecting the European Central Bank (ECB) to cut interest rates for the first time by the end of the second quarter. Around 73 percent (62 of 85 participants) assumed that the euro watchdogs would reduce key interest rates at least once before their interest rate meeting in July, according to the survey published on Thursday. In December, only 57 percent of economists had expected this.
Economists quickly adjusted their expectations. In November, the majority of economists still assumed that the ECB would not change interest rates until mid-2024. All participants in the latest survey from January 12th to 17th expected that the monetary authorities would keep their feet still at their first interest rate meeting of the new year on Thursday. This means that the deposit rate that is relevant on the financial market and that financial institutions receive when they park excess funds with the central bank would remain at the record level of 4.00 percent.
In the survey, 45 percent of participants, 38 out of 85 economists, expected the ECB to cut interest rates for the first time at its monetary policy meeting in June. 21 economists were already expecting this in April. 23 economists assumed that the monetary authorities would only reverse course in the third quarter or even later. More than 60 percent of participants who answered a separate question – 27 of 43 – thought the first step down could come sooner than they expect. From the perspective of 16 economists, it is possible that the first interest rate meeting could take place later than they currently assume.
Using the median in the survey, the economists expected that the ECB would lower the deposit rate by a total of 1.00 percentage points this year. This would mean the rate at the end of the year would be 3.00 percent. 36 of the 85 economists predicted a higher deposit rate at the end of the year, 27 predicted a lower one.
IMF deputy head advises caution
The International Monetary Fund (IMF) advises central banks to proceed cautiously when it comes to possible interest rate cuts. Inflation is expected to fall less sharply this year than last year, said IMF deputy head Gita Gopinath in the “Financial Times” (Thursday edition). Among the reasons she cited tight labor markets and high inflation in the services sector in the US, Europe and elsewhere. Therefore, a bumpy path towards lower inflation rates can be expected. “The work isn’t done yet,” she said. “Central banks need to proceed cautiously.”
At the same time, Gopinath warned monetary authorities against further fueling stock market speculation about rapid interest rate cuts. As soon as central banks lower interest rates, the expectation of further downward steps solidifies and in the end there is much more easing, which could be counterproductive. “Based on the data we’ve seen, we would expect rate cuts to occur in the second half, not the first half,” she added.
In the euro zone, the inflation rate was 2.9 percent in December. As recently as autumn 2022, it was at times over ten percent. Prices on the financial market show that investors are currently assuming that the European Central Bank (ECB) will lower interest rates for the first time in March or April. In contrast, several of the ECB’s euro watchdogs had recently tried to somewhat dampen expectations of rapid interest rate cuts. ECB President Christine Lagarde said in Davos on Wednesday that she would not yet declare victory over inflation.
You can read more about the topic here:
- Lagarde: Interest rate cuts only when inflation is two percent
- What will happen to interest rates in 2024? That’s what the experts say
- 25 years of the ECB: An anniversary in difficult times
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