When Will the ECB Start Cutting Rates?

“We
believe
the
stars
are
aligning
for
pending
rate
cuts,”
he
says.

“With
the
ECB
carefully
weighing
up
a
future
interest
rate
cut,
near-term
data
points
are
more
important
than
ever,
with
inflation
key,”
he
says.
“While
it
remains
highly
unlikely
that
we
will
see
a
rate
cut
at
the
next
meeting
in
March,
European
investors
are
at
least
hoping
for
a
more
dove-ish
tone
to
the
statement,
tee-ing
up
near-term
rate
cuts.“ 

ECB
Rates
Decision:
A
Divided
Council   

ECB
board
member
Isabel
Schnabel
told
the
Financial
Times
in
early
February
that
inflation
“could
flare
up
again”.
The
“last
mile”
of
getting
inflation
down
will
be
the
hardest,
she
said.
“We
see
sticky
services
inflation.
We
see
a
resilient
labour
market.
At
the
same
time
we
see
a
notable
loosening
of
financial
conditions,”
she
said.  

But
comments
by
Italy’s
central
bank
chief
Fabio
Panetta
show
how
divided
the
council
is.
In
a
separate
interview,
he
told
the
newspaper
that
the
time
for
cutting
rates
is
“fast
approaching”.
Striking
more
doveish
tones
than
Schnabel,
he
dismissed
fears
of
a
fresh
inflation
spiral
and
said
inflation
in
the
euro
area
was
falling
faster
than
expected. 

Inflation
Trend
Backs
the
Rate
Cut
Case

December’s
spike
in
inflation,
albeit
a
technicality,
fed
into
the
bank’s
conservative
stance
of
keeping
rates
on
hold.

January’s
fall
in
inflation
however
adds
to
the
argument
for
cutting
rates.   

The
consumer
price
index
growth
in
the
Eurozone
fell
to
2.8%
in
January,
down
from
2.9%
in
December,
which
matched
economist’s
expectations.
Core
inflation,
which
shows
prices
without
energy
and
food
costs,
fell
10
basis
points
to
3.3%
year
on
year,
and
missed
expectations.
But
it
is
still
moving
in
the
right
direction.  

“European
flash
inflation
fell
in
January
by
0.1%
to
2.8%,
a
welcome
downward
move
after
the
spike
we
saw
in
December,”
says
Michael
Field.
“Core
inflation,
albeit
higher
at
3.3%
is
also
moving
in
the
right
direction,
mirroring
the
0.1%
fall.
That
core
inflation,
usually
stickier,
is
still
falling,
is
indeed
a
positive
sign.”  

There
is
some
concern
that
military
tensions
in
the
Red
Sea
will
keep
prices
elevated,
particularly
in
Europe,
says
Amundi
Global
Asset
Management.
Thus,
the
central
bankers’
job
is
difficult
as
they
aim
to
maintain
rates
at
a
restrictive
level
for
the
right
amount
of
time. 

No
Rate
Cuts
Before
June?

A
significant
slowdown
in
current
wage
increases
and
further
progress
on
inflation
are
required
for
a
rate
cut
in
April,
says
Steven
Bell,
economist
at
Columbia
Threadneedle
Investments.
Since
there
is
no
meeting
in
May,
the
next
date
for
a
rate
cut
is
not
until
June.  

The
economists
at
ING
concur.
“The
ECB
is
expected
to
cut
rates
from
June
onwards,
but
more
cautiously
than
the
market
is
currently
anticipating,”,
says
Peter
van
den
Houte
of
ING.
The
decline
in
core
inflation,
now
at
3.3%
year
on
year,
is
likely
to
slow.
 But
wage
growth
remains
too
high
for
comfort.  

“ECB
President
Christine
Lagarde
clearly
stated
that
the
disinflation
process
would
have
to
advance
further
for
the
central
bank
to
be
sure
that
it
is
sustainable,”
van
den
Houte
says.
“This
led
her
to
conclude
that
a
rate
cut
before
summer
remains
unlikely.
We
think
June
is
still
likely
for
a
first
25bp
rate
cut.
But
thereafter,
the
ECB
is
likely
to
reduce
interest
rates
only
gradually.
While
the
market
already
anticipates
short
rates
at
2.5%
by
the
end
of
this
year,
we
only
see
that
level
in
the
second
quarter
of
2025.” 

Eurozone
GDP
Concerns 

Meanwhile
the
eurozone
continues
to
be
plagued
by
growth
concerns.
The
eurozone
gross
domestic
products
(GDP)
contracted
in
the
third
quarter,
but
stagnated
in
the
fourth
quarter,
narrowly
avoiding
a
technical
recession. 

Early
indicators
for
January
are
mixed.
The
composite
PMI
indicator
rose
in
January,
but
remained
below
50,
indicating
continued
economic
contraction.
The
economic
sentiment
indicator
from
the
European
Commission
saw
significant
progress
in
December
but
that
was
not
sustained
in
January.

The
Eurozone’s
largest
economy

Germany
is
meanwhile
stuck
in
a
recession.
The
Ifo
indicator
fell
to
three-and-a-half
year
low.
Industrial
production
declined
by
1.6%
in
December
on
a
monthly
basis,
and
was
down
1.5%
in
2023
overall
compared
to
the
previous
year.
Exports
fell
by
4.6%
in
December
and
1.4%
across
the
year. 

“Germany,
once
the
powerhouse
of
Europe,
is
now
tagged
‘the
sick
man
of
Europe’
appearing
as
it
does
to
be
in
the
middle
of
a
technical
recession
(two
consecutive
quarters
of
negative
GDP
growth”,
said
Keith
Palmer,
portfolio
manager
at
Columbia
Threadneedle.  

Mortgage
Rates
Stay
Elevated  

Borrowing
costs
across
the
Eurozone
meanwhile
stay
elevated.
Mortgage
rates
increased
further
to
4%,
the
ECB
said
in
its
recent

Economic
Bulletin.
Bank
lending
rates
for
firms
meanwhile
declined.
Demand
for
credit
from
both
households
and
firms
fell
in
the
first
month
of
the
year.  

But
consumers
are
expecting
mortgage
rates
to
decline
from
their
current
levels
over
the
next
12
months,
according
to
the

ECB’s
Consumer
Expectations
Survey.
“A
large,
but
declining,
net
percentage
of
survey
respondents
perceived
credit
standards
to
be
tight
and
expected
housing
loans
to
become
harder
to
obtain
over
that
same
period”,
according
to
the
mid-January
survey.  

Mortgage
markets
function
very
differently
among
Eurozone
countries.
While
Germans
existing
homeowners
are
less
affected
by
rising
mortgage
rates
as
lending
terms
are
usually
fixed
for
10-
or
15-year-
periods,
Spanish
homeowners,
for
instance,
might
be
suffering
more
through
exposure
to
variable
rates. 

Will
the
Fed
Lead
the
Way
on
Rate
Cuts?

Still,
the
ECB
has
much
more
leeway
to
cut
rates
than
its
counterpart
on
the
other
side
of
the
Atlantic.
Last
year,
markets
expected
that
central
banks
would
start
cutting
rates
simultaneously,
and
that
is
why
even
here
in
Europe
there
was
such
a
focus
on
the
Fed,
says
Morningstar’s
Field.
But
the
US
economy
is
more
resilient,
so
the
Fed
has
a
more
difficult
task,
Field
adds.
Europeans
should
not
be
looking
at
the
US
to
lead
the
way
in
monetary
easing. And

the
prospect
of
a
March
rate
cut
by
the
Fed
seems
now
to
be
less
likely
after
recent
CPI
data.
Markets
are
now
looking
at
May
for
the
first
US
interest
rate
cut.

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