The ECB’s rate hike is over… but no cut before at least July

by Jonathan Cable

LONDON, Oct 20 (Reuters) – The European Central Bank’s (ECB) rate hike cycle is over, a Reuters survey of 85 economists shows, but it will take until at least July 2024 for the Frankfurt institution to begin to ease its monetary tightening, as the fight against inflation continues.

The ECB raised its key interest rates by 25 basis points in September, bringing the deposit rate to 4.00% and the refinancing rate to 4.50%, but it suggested that this tenth increase of completed in 14 months would probably be the end of a cycle that began in July 2022.

Among the economists surveyed from October 12 to 19, none revised upwards their outlook on the evolution of rates, but the timetable for the first reduction in the cost of credit has become more uncertain.

According to the median forecast of economists and 58% of economists surveyed, or 48 out of 83, the first rate cut will come in the third quarter of 2024, or later in the year, and the deposit rate should be reduced to 3.50% at the end of September 2024.

In a survey carried out after the ECB’s September meeting, 29 of the 70 economists surveyed said that the institution’s first rate cut would take place in the second quarter of 2024, or even earlier.

A little more than 40% of people surveyed in the latest survey, or 35 out of 83, however, continue to think that the first monetary easing measure would take place before the ECB Governing Council meeting in July.

“Our model suggests that a rate cut could come sooner, but the data would need to be more moderate than what is currently expected. So I think a cut in September 2024 is a pretty balanced view,” said Kristian Toedtmann from DekaBank.

In a separate Reuters survey, a narrow majority of economists expect the U.S. Federal Reserve (Fed) to cut rates before mid-2024.

RISK OF A DROP IN RATES LATER THAN EXPECTED

Asked what the biggest risk was in their forecasts, 25 economists said the rate cut would come later than expected, while 19 said it would come sooner than expected.

“Recent data on activity and inflation have been weaker than expected, but that will not prevent Christine Lagarde (President of the ECB) from sticking firmly to the idea of ​​high rates for a long time,” notes Jack Allen-Reynolds of Capital Economics.

The governor of the Bank of France, François Villeroy de Galhau, reaffirmed last week that, in his opinion, the ECB should maintain its key rate at its current level for as long as necessary.

Inflation in the euro zone is on a downward trajectory but it still represents more than double the ECB’s target of 2.0%, compared to the figure of 4.3% published for September.

The trend of slowing price growth is expected to continue, but the survey concluded that it would take until at least the third quarter of 2025 for inflation to return to the target level. It should average 5.6% this year, then 2.7% in 2024 and 2.1% in 2025.

The recent surge in oil prices, notably against a backdrop of fears of an escalation in the conflict between Israel and Hamas, however, represents a threat to inflation.

On gross domestic product (GDP), the eurozone is expected to narrowly avoid a recession, but the economy is expected to stagnate in the third and fourth quarters amid high interest rates and rising prices which push consumers to restrict their spending.

“Right now things are getting worse and so it is very likely that we will all revise our forecasts downwards. The eurozone doesn’t have much to offer at the moment,” said Melanie Debono of Pantheon Macroeconomics.

The GDP of Germany, Europe’s largest economy, probably contracted in the third quarter and is expected to decline further in the current quarter and the next, sinking very clearly into a technical recession. Growth in France, the second largest economy in the currency bloc, should on the other hand remain relatively robust. (Reporting Jonathan Cable; investigations by Purujit Arun, Pranoy Krishna and Anitta Sunil; French version Claude Chendjou, edited by Blandine Hénault)