PARIS, January 30 (Reuters) – The European Central Bank (ECB) will begin to ease its monetary policy in June and will make only five cuts in its key rates over the entire current cycle, Nomura estimated on Tuesday, which judges expectations of markets in this area are too optimistic.
“We expect a 25 basis point cut in the ECB deposit rate for each of the meetings in June, July, September, October and December,” said Andrezj Szczepaniak, vice president of European Economics at Nomura, during of the Japanese broker’s presentation in Paris of the macroeconomic outlook for Europe.
The ECB’s deposit rate being currently at 4.0%, this would bring it down to 2.75%, a level higher than that of most forecasters, with Neuflize OBC estimating for example that this rate could fall to as much as 1.5% by mid-2025.
Nomura does not share this forecast, ensuring that the rate of 2.75% also constitutes the terminal level of the drop in the cost of credit expected in the euro zone.
The Japanese broker’s forecast is largely based on what is known as the neutral rate, that is, a level that neither stimulates nor slows down the economy.
“We see the neutral rate between 2.25% and 2.75% because the structure of the economy has changed with inflation now more volatile,” explains Andrezj Szczepaniak. He acknowledges, however, that it is difficult to estimate, with some economists placing it between 1.5% and 2% before the COVID-19 pandemic.
Money markets are currently pricing in, with a 95% probability, an ECB rate cut from April and are forecasting a reduction of 150 basis points by the end of the year, which would bring the rate down deposit at 2.5% by this horizon.
Concerning the outlook for price developments and wage growth in the euro zone, Nomura anticipates overall inflation of around 2% and “core” inflation (excluding volatile elements) of around 2.4% by the end of the year.
The Japanese financial services group explains in its nine-month advanced projections that wage growth in the currency bloc will increase from a rate of 4.7% in the third quarter of 2023 to around 4% this year.
“Companies are starting to lower their margins to absorb wage growth and the disinflation process is more pronounced than expected,” noted Andrezj Szczepaniak.
Despite the risk of recession in the euro zone, Nomura does not believe in a rapid drop in the cost of credit. The broker underlines that the better than expected figure of the first estimate of euro zone GDP for the fourth quarter of 2023, published this Tuesday, “reassures him in the idea that this should not encourage the ECB to reduce its interest rates. interest earlier than we currently anticipate for the month of June.” (Writing by Claude Chendjou, edited by Kate Entringer)
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