LDN - Business

ECB to trim rates in Sept and Dec, risks tilted towards fewer cuts, Reuters poll shows

[July 11, 2024] By Indradip Ghosh

BENGALURU (Reuters) - The European Central Bank will cut its deposit rate twice more this year, in September and December, according to a strong majority of economists polled by Reuters, who said the balance of risks was tilted towards just one additional cut by year-end.

After delivering a rate cut in June that was widely telegraphed in advance, several Governing Council members including ECB President Christine Lagarde have indicated they are in no hurry to lower borrowing costs further as a crucial services component of inflation remains stubbornly high.

That, alongside record-low unemployment and elevated wage growth, has raised some doubts over future rate reductions.

While all 85 economists in the July 4-11 Reuters poll predicted the ECB will keep interest rates unchanged on July 18, more than 80%, or 69 of 85, expected it to cut the deposit rate twice more this year, in September and December, taking it to 3.25%.

That was broadly in line with last month's survey and interest rate futures pricing. While 11 expected just one more reduction this year, four predicted three additional cuts.

"We believe inflation is stickier than the ECB's models currently forecast... This means they will have the tendency to cut rates gradually, unless their forecasts change substantially or realized data cast more doubt about the outlook," said Bas van Geffen, senior macro strategist at Rabobank.

Nearly two-thirds of economists, or 21 of 33, who responded to an extra question said the end-2024 deposit rate was more likely to be higher than they expect rather than lower. Twelve said the opposite.

Inflation, which eased to 2.5% last month from 2.6% in May, was not expected to hit the ECB's 2% target until the second half of 2025 and core price pressures were predicted to remain elevated over the rest of 2024.

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The building of the European Central Bank (ECB) seen before the ECB's monetary policy meeting in Frankfurt, Germany, June 6, 2024. REUTERS/Wolfgang Rattay/File Photo

Asked which component of core inflation would be the stickiest, most economists said services. Services prices rose 4.1% in June compared with a year earlier and have broadly stayed around that level since the start of this year.

"Services momentum has rebounded sharply since the slump at the end of last year, especially in demand-sensitive components," said Lucas Krishan, macro strategist at TD Securities.

"If this trend continues, or the disinflationary trend in services inflation stalls even more, then a slower cutting pace, or even a prolonged pause, could be warranted."

Also, a tight labour market is not helping bring inflation pressures down. The unemployment rate is forecast to stay around a record low of 6.4% until at least 2027, the poll showed.

Despite multi-year wage deals already struck by unions bolstering expectations that pay increases are on a downward slope, wage growth has a long way to fall to the 3% rate the ECB considers consistent with its inflation target.

The central bank is expected to reduce the deposit rate three times next year, according to poll medians, one cut fewer than expected last month, reaching 2.50% by end-2025.

The euro zone economy, which grew 0.3% in the first quarter, will average 0.7% growth this year and 1.4% next, unchanged from the last poll. The region's No. 1 economy, Germany, will expand a meager 0.2% this year and 1.2% in 2025.

(Reporting by Indradip Ghosh; Polling by Pranoy Krishna, Purujit Arun and Mumal Rathore; Editing by Ross Finley and Hugh Lawson)

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