It is too early to expect the European Central Bank (ECB) to start reducing interest rates this spring, Irish experts have warned, even amid mounting speculation the bank may start to cut as soon as March.
With euro zone inflation now markedly lower than forecast, financial markets are pricing in a 60-70 per cent probability that the first rate cut will come in March – much sooner than forecast previously – and the Frankfurt-based ECB will implement 1.5 percentage points of cuts in 2024 as a whole.
Yet several Irish-based analysts said such speculation is premature and the ECB won’t cut until much later in the year, possibly not until September, and only after further falls in inflation and a levelling-off in pay growth, which remains elevated.
“A predominantly hawkish ECB governing council may want to see the HICP [harmonised index of consumer prices] measure very near to or below their mandated 2 per cent for two or three consecutive months before they even contemplate a pivot,” Justin Doyle of Investec Europe’s Irish branch said.
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“Also being mindful of the ECB’s worries over the labour market and members’ insistence that they want to see the wage numbers at the start of this year before making a call, a first cut at their March or April meetings does seem premature. A first 0.25 per cent cut at their June 6th sits better with us,” Mr Doyle said.
He also noted that December’s German, French and euro-zone inflation numbers, due this week, would have a strong bearing on the council’s assessment. ECB chief economist Philip Lane said last month he expected a pick-up in headline inflation across the euro area in December and that it would remain above the ECB’s target rate of 2 per cent for all of 2024.
Bank of Ireland chief economist Conall Mac Coille noted opinion was “clearly split” on the timing of possible ECB rate cuts.
“The current 4 per cent deposit rate is very restrictive for the euro area, given its lacklustre growth prospects and with HICP inflation back close to the 2 per cent target, so the ECB will almost certainly have to cut rates in 2024,” he said.
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“Financial markets clearly haven’t bought the ECB’s cautious tone that rate cuts aren’t on the immediate agenda,” Mr Mac Coille said.
“However, the outlook for ECB rates is clearly very uncertain and will ultimately depend on whether further falls in HICP inflation, and crucially current elevated rates for pay growth, emerge in the coming months. There’s always the possibility of unwelcome surprises that show underlying, medium-term inflationary pressures are more resilient than expected,” he said.
Eoghan O’Hara of German savings platform Raisin said the group did not expect the ECB to start cutting rates until September.
“Although the ECB is satisfied with the progress in disinflation, we do not expect to see any reduction in movement until late 2024,” he said.
“Factors such as rising competition, slower deposit growth, increasing liquidity pressure and declining market rates drive the industry in different directions,” he said.
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“It will be interesting to see how these factors will impact deposit rates in 2024. While we expect average rates to continue climbing, we also anticipate some levelling-out at the top end,” he said.
“When can we expect to see the first ECB rate cuts? Well, September now seems like a long time ago when the focus was on rate hikes, and we anticipate the path to the first cuts to be equally long. Disinflation is on track, with the ECB’s 2 per cent target in striking distance, but it’s still a delicate topic and subject to many external factors,” Mr O’Hara said.
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