Economists warn ECB to avoid delaying last two rate cuts

Irish Examiner

4 days ago

The European Central Bank will lower interest rates twice more, according to a Bloomberg survey, but respondents warned it shouldn't wait too long between those moves or investors will conclude that its easing campaign is already over.
Respondents predict quarter-point reductions on June 5 and at September's meeting, when new quarterly forecasts should shed more light on the effects of US President Donald Trump's reordering of global trade. That would bring the deposit rate to 1.75%, where the poll sees it settling through the end of 2026.
With inflation near 2%, Belgium's Pierre Wunsch and Greece's Yannis Stournaras — who hail from either end of the hawk-dove spectrum — have each discussed the merits of pausing soon. As well as buying time to digest the jolts from Trump's tariffs, a timeout would signal ECB loosening is approaching an end, without formally committing.
'Further easing is still on the cards this year but most likely not before autumn,' said Nerijus Maciulis, chief economist at Swedbank. After June's cut, 'the Governing Council will have a full three months to assess the impact of changes in US trade policy.'
Sitting out one or more meetings before continuing to trim borrowing costs would risk communication challenges for President Christine Lagarde that grow with time, the poll showed. Almost 30% of analysts say the ECB can hold just once before markets conclude rates are at a floor. A quarter reckon it can afford a pause stretching for two meetings.
The ECB is wary of confusing investors. An account of its last policy meeting revealed that officials saw the need 'to be a beacon of stability' and not cause 'more surprises in an already volatile environment, which might amplify market turbulence.'
Asked at which point the ECB would acknowledge that it's finished lowering rates, most survey respondents said it won't.
'The ECB wants to keep all options open,' said Ulrike Kastens, a senior economist at DWS International. 'Although the disinflationary trend is well on track in the short term, the ECB is likely to reiterate that the medium-term outlook for inflation is uncertain.'
A stronger euro, cheaper oil and softer economic growth — consequences of the trade uncertainty — suggest inflation will reach the ECB's target sooner than previously thought. But risks including supply-chain disruptions and retaliatory tariffs by the European Union could revive price pressures down the line.
Euro-area consumers are showing signs of concern. Their expectations for inflation over the next 12 months ticked higher in both March and April.
Analysts predict the ECB's new outlook next week will largely confirm the one presented in March, with weaker inflation this year and slower growth in 2026. But they also warn the forecasts won't fully account for the trade mess the euro zone could find itself in.
'The biggest challenge will be how to deal with ongoing tariff uncertainty,' ING's Carsten Brzeski said. 'The ECB needs to wait until the end of the 90-day pause before it can incorporate tariffs into its projections. This means that, for now, only the disinflationary impact from a stronger euro and lower oil prices will dominate the rate decision.'
The alternative outcomes that the ECB will publish alongside its baseline may help determine the best course of action. But the fact that such scenarios are being prepared at all — having not been used since the pandemic and Russia's attack on Ukraine — underscore the ever-changing backdrop with which policymakers are grappling.
'After several months in which ECB policy has been very predictable, the summer could present bigger challenges,' said Fabio Balboni, a senior euro-zone economist at HSBC. 'An increasing divergence seems to emerge within the Council on what's next.'
In addition to rates, some officials want to discuss the implications of quantitative tightening as maturing bonds roll off the ECB's balance sheet. Executive Board member Piero Cipollone has said rate cuts, which ease financing conditions, should 'compensate' for QT.
Only about a quarter of respondents share his concern and say the ECB should halt the policy — either immediately or once reductions in borrowing costs are over.
Traders are betting on at least one more cut this year beyond June, fully pricing it will arrive by October with a 30% chance of further reduction by December. A quarter of economists, however, see next week's rate move as the end of the line.
'The ECB will need to send a message that balances the baseline that the cutting cycle is essentially done, while keeping its options open for any negative shocks that may materialize,' said Bas van Geffen, senior macro strategist at Rabobank. 'That's a tightrope to walk, with the markets pricing further cuts and still biased to look for lower rates.'
Bloomberg.