(Bloomberg) -- The European Central Bank will take a measured approach to lowering interest rates as political upheaval opens up a litany of risks to inflation’s return to 2%, according to a Bloomberg survey of analysts.
After June’s initial quarter-point reduction, respondents expect officials to take a timeout when they meet next week. Cuts are expected to resume again in September, coming once a quarter until the deposit rate reaches 2.5% a year later.
The gradual reversal of unprecedented monetary tightening reflects rising difficulty in assessing the economic pitfalls ahead for the 20-nation euro zone. Inflation pressures remain strong, and the recovery from months of stagnation may already be fizzling out. Elections, meanwhile — especially across the Atlantic — are forcing investors to rethink everything from government spending to trade.
Analysts now rank November’s US presidential vote and the threat of another term for Donald Trump as the biggest danger to the region’s economy, while France’s turmoil has stirred memories of Europe’s sovereign-debt crisis last decade.
Faced with such uncertainty, officials led by President Christine Lagarde aren’t pre-committing to a path for rates, pledging to decide as data arrive. Chief Economist Philip Lane is among those saying July mainly provides an opportunity to take stock.
Markets are even more circumspect than economists, only fully pricing one more reduction in the deposit rate this year, though leaning toward another.
“There’s simply no urgency to continue cutting rates at the current juncture,” said Carsten Brzeski, ING’s head of macro. “Therefore, the ECB will finally stick to its data-dependency approach and will — and should — refrain from giving any forward guidance.”
Political factors are casting an ever-longer shadow. In the US, the threat posed by Trump is compounded by confusion over whether he’ll face President Joe Biden or another Democratic candidate. At home, snap French elections have rattled investors, even if the situation has stabilized somewhat since the initial shock.
What Bloomberg Economics Says...
“The next meeting on July 18 will be closely watched by investors to fine-tune their expectations for the timing of the next rate reduction, even though it’s almost certain to leave rates unchanged this month. Lagarde is likely to hint at another move in September, without being too committal.”
—David Powell, senior euro-area economist. Read more here
The vast majority of analysts says the ECB won’t shift course as a result of events there. Only one of the 29 polled expects officials to tweak their quantitative-tightening plans. Just two see them tilting remaining reinvestments toward France.
“This is an option for the Eurosystem ahead of any contemplation of the TPI,” Scope Ratings Dennis Shen economist said, referring to a backstop created in 2022 to counter “unwarranted, disorderly” market moves as the ECB started to hike rates.
Only one respondent says the program will be activated in the next three months.
In contrast, a significant number frets that economic growth could be weaker and inflation stronger than the ECB projected in June. Services costs, in particular, are still a big concern, driven partly by wage gains that are expected to remain strong.
“Service-sector firms report that supply factors, not a lack of demand, are inhibiting them from increasing output,” said Andrzej Szczepaniak, senior European economist at Nomura. “Hence, still acute labor shortages and resilient services demand risk keeping service-sector inflationary pressures elevated near- and medium-term.”
Next week’s meeting should be “uneventful,” he reckons, with the focus on “whether the ECB tees up September for another cut.”
Some say the growing chances of a reduction in US borrowing costs by the Federal Reserve may nudge its counterpart in Frankfurt to act more rapidly.
“With Fed rhetoric shifting anew toward interest-rate cuts as activity and labor-market data appear to normalize from very robust levels, the ECB should put the resumption of cuts back in the table,” said Hlias Tsirigotakis, an economist at the National Bank of Greece.
Nobody, though, expects rates to be reduced on Thursday.
“Incoming data are noisy, and it will be uneasy for the Governing Council to reach a clear view of the extent of the rebound in terms of growth and the underlying trend in inflation,” said Sylvain Broyer. “All this in an unsettled political landscape in Europe and nervous debt markets.”
--With assistance from Marilen Martin.
©2024 Bloomberg L.P.