No ECB Rate Cuts 'til July 2024


Despite the euro area facing a predicted recession, a majority of economists polled by Reuters agree that the first rate cut is unlikely to occur until July

In the previous month, the European Central Bank sustained a record high deposit rate of 4.00%, ending a cycle of rate hikes that spanned ten consecutive meetings. In the recent Reuters poll conducted from November 8 to 13, all 72 economists unanimously expressed the view that no further rate hikes are anticipated in the ongoing cycle.

Although financial markets are anticipating a rate cut in April, the latest Reuters poll suggests that such a move is unlikely, especially after ECB President Christine Lagarde emphasized last month that it was premature to discuss a rate cut.

Of the economists surveyed, 55% expect rates to stay at current levels until the middle of next year, while 45% believe a cut might occur sooner, possibly by the July meeting of the ECB's governing council.

These findings align with a previous survey conducted last month, where 58% of respondents did not foresee a rate cut before the July meeting.

Pieter Vanden Houte, ING Eurozone Chief Economist, noted that while economic growth was weaker than expected, it doesn't necessarily imply that the ECB will rush to cut rates. The prediction suggests that the rate reduction may not materialize until the summer of 2024.

An earlier rate cut is anticipated to necessitate a significant recession, even if inflation remains above the ECB's 2% target. Over 40% of economists forecast another contraction in the coming quarter after the euro area economy contracted by 0.1% in the third quarter, meeting the official definition of a recession.

Despite expectations of a slight and short-lived recession in the euro area, the US Federal Reserve is anticipated to take policy easing steps slightly earlier than the European Central Bank, possibly by the end of the second quarter. However, there is a risk that this might occur later than economists predict.

If the ECB were to cut rates before the Fed, it could result in a weaker euro and unwanted imported inflation. That being said, price pressures are expected to remain resilient.

Headline inflation, set at 2.0%, fell to 2.9% last month, and core inflation has averaged 5.0% this year, taking into account volatile food and energy prices.

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