All 82 economists surveyed by Reuters seem to be in agreement that the European Central Bank would lower interest rates on June 6. Most of them also projected two more rate cuts in September and December.

However, financial markets are pricing in just two ECB rate cuts in total for 2024—a dramatic retreat from the six cuts that were anticipated at the beginning of the year—presenting an unusual scenario in which traders anticipate lower rate cuts than economists.

Though inflation appears to be improving, concerns have been raised about how quickly the ECB may be able to cut rates in light of the recent acceleration of wage growth. It has almost given away a June reduction through many clues that officials have dropped in recent months.

In a Reuters survey conducted from May 21 to 28, all 82 analysts expected that on June 6, the ECB will lower its deposit rate by 25 basis points to 3.75%.

However, with the U.S. Federal Reserve being ambiguous about the timing of its first cut, which is now expected to occur in September at the latest and is now priced for November by markets, the discussion over how much space the ECB has to cut has heated up.

Nevertheless, 55 out of 82 respondents, or more than two thirds, predicted that the ECB’s Governing Council (GC) will make two further cuts this year, in September and December. It increased from a little over half in a poll conducted in April.

As some economists have lowered their expectations for rate reduction from 100 basis points or more this year, the consensus view now favours three cuts in 2024. Compared to over 40% last month, just 22% now predict that the deposit rate will be 3.00% or less by the end of 2024.

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Mariano Cena, senior European economist at Barclays, stated, “We now think the GC will move more gradually this year due to elevated uncertainty and activity accelerating faster than anticipated.”

Cena has moved a follow-up cut from July to September. “This would take place even if risks to the inflation outlook beyond this year are more symmetric and even potentially to the downside,” Cena stated.

When asked which was the most likely scenario for ECB rate reduction this year, 25 out of 34 economists answered that it was more likely that less than they had anticipated.

Twenty out of the 77 common donors who participated in the polls this month and last saw less rate reduction.

The ECB, which raised rates by 450 basis points between July 2022 and September 2023, would only slightly lower the deposit rate to 2.50% in the next reduction cycle, according to the median of 35 replies to an extra question.

However, inflation may stay high for a longer period of time since wage growth is predicted to stay over 3% until at least 2026, which is the level the ECB views as consistent with its 2% inflation objective.

According to a different Reuters survey, inflation is predicted to increase to 2.5% this month from 2.4% in April. It was anticipated to take until Q3 2025 to reach the aim.

Bert Colijn, senior euro zone economist at ING, said, “The ECB has recently put a lot of emphasis on wage growth coming down as a condition for rate cuts. The question is how much this unexpected increase will startle it ahead of the June meeting.”

“While the euro zone economy has been performing sluggishly for some time and inflation has fallen back towards target faster than expected, enough uncertainty remains to not expect a traditional rate cutting cycle to emerge.”

According to the survey, the economy of the euro zone, which expanded by 0.3% last quarter—better than anticipated—will grow by 0.3% this quarter and the next. This year’s average economic growth was predicted to be 0.7%, up from the previous survey.

(Adapted from Reuters.com)

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