ECB Jostling Over Back-To-Back Summer Cuts Has Already Begun
European Central Bank interest-rate setters are starting to position themselves for the next debate as a first cut in June becomes increasingly certain and inflation continues to slow.
(Bloomberg) -- European Central Bank interest-rate setters are starting to position themselves for the next debate as a first cut in June becomes increasingly certain and inflation continues to slow.
The question the members of the Governing Council eventually need to settle is whether to follow their initial foray into monetary easing with another move at their July policy meeting — or wait at least until September.
Even if President Christine Lagarde downplays any talk of such a step after Thursday’s gathering, the discussion is already under way. A few officials have spelled out their preference directly, while others may be shaping the path ahead more indirectly by insisting that a move this week remains an option, according to Kamil Kovar, an economist at Moody’s Ratings.
“We believe that the doves are preparing the ground now to get the July cut later on,” he said. “That’s why they fight now, to make the appearance that they will be compromising. Like this they can say we compromised, and now it’s really time to cut rates properly.”
Greece’s Yannis Stournaras has been most explicit about favoring two consecutive reductions before the August summer break. ECB Executive Board member Piero Cipollone has said there’s scope to cut rates “swiftly” despite strong wage gains, which have worried policymakers for the last few months.
Malta’s Edward Scicluna and Bank of France Governor Francois Villeroy de Galhau are among those who haven’t ruled out starting monetary easing this week. Others, like Portugal’s Mario Centeno, have emphasized that lower borrowing costs are necessary to prevent harming the euro area’s feeble economy.
None of the economists polled by Bloomberg expect any lingering desires for a cut this Thursday to be fulfilled. They widely predict easing to commence in June, though a majority expects a pause the following month. Investors currently see the chance of a second step down before the summer break at just over one-in-two.
Dutch central-bank chief Klaas Knot has expressed a preference to focus on meetings when new quarterly forecasts are available — suggesting he might favor September over July for a second move. Bundesbank President Joachim Nagel told investors they shouldn’t conclude that after a first cut, the same will happen at every subsequent meeting.
While Villeroy has said the same, he also added that “we will need to keep that option open.”
Most have stressed the need to have an open mind — a sentiment captured by Lagarde last month when she said the ECB “cannot pre-commit to a particular rate path” even after a first cut.
Key to the debate will be how quickly inflation continues its descent toward — and possibly below — the 2% target. In March, consumer prices rose an annual 2.4%, slightly less than economists had predicted, and further deceleration is predicted in the coming months.
“We think that for the ECB, inflation outcomes would have a bigger bearing on the likelihood of having back-to-back cuts,” said Fabio Balboni, an economist at HSBC. “Unless growth surprises significantly to the upside – which seems unlikely – the case to remove the restrictive part of policy, as Ms Lagarde put it at the March meeting, would remain strong.”
That also means that two consecutive moves needn’t necessarily set the tone for the rest of the year and raise the expectation that cuts will follow at every single meeting. Framing the first reductions as removing some of the drag on the economy “would be perfectly consistent with moving faster earlier on, to slow down later,” according to Balboni.
What Bloomberg Economics Says...
“Since the ECB’s last meeting, the debate among policymakers appears to have moved on from the timing of the first interest-rate reduction, which now seems like a done deal for June, to how many cuts will follow this year.”
—David Powell, senior euro-area economist. Read the full preview here.
So far, inflation has developed broadly in line with the ECB’s March forecast, according to Bloomberg Economics. But it expects a dip below target in August, a scenario the Frankfurt-based central bank so far only sees in the second half of 2025.
On the other hand, services inflation held steady at twice the ECB’s target last month and wage gains remain a concern. An ECB survey offered some relief on Monday, showing that firms expect a slowdown in pay gains over the next 12 months.
But if more evidence of a sustainable slowdown remains scant, officials might prefer to remain cautious.
“The ECB may be in a tricky position in June – not only could unit labor cost growth surprise to the upside, but economic activity and confidence may also be on the rise,” said Anatoli Annenkov, an economist at Societe Generale. “This should limit the ECB’s options to quarterly 25 basis-point cuts with the staff forecasts adjusting for the incoming data.”
The return of trust in those projections makes them even more important, and a clear message could reduce the need to wait for official data that only arrives with a long lag — especially as some officials worry about falling behind the curve in lowering borrowing cuts.
“The ECB will start cutting rates in 2024 but remains highly data dependent in deciding on the pace of cuts,” said Ann-Katrin Petersen, senior investment strategist at the BlackRock Investment Institute. “Over time, actual data of underlying inflation and financial conditions might become somewhat less important given the ECB has indicated that its confidence in its own inflation forecast has increased.”
--With assistance from Alice Gledhill and James Hirai.
(Updates with ECB survey in 15th paragraph.)
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