He made it clear the president of the ECB herself, Christine Lagardedespite all its ‘ifs’ and ‘buts’: the euro area rates, always provided that the sine qua non of inflation oriented towards the 2% target is achieved, they could be cut.
For quite some time now, it seems like June the ideal timing: that is when the next date on which the Governing Council of the European Central Bank will meet will fall.
By that day, Lagarde will have obtained more precise information on the wage dynamics, which will arrive in May.
But the question at this point is: how many times will the ECB cut rates during 2024, as well as in 2025 and 2026?
Above all: to what levels will Eurozone rates fall?
ECB rate survey (SPF): here’s when the first cut will arrive
Answers to this series of questions have arrived with the publication by the ECB of the results of the survey in which the analysts interviewed by Eurotower itself participated.
It’s about the Survey of Professional Forecasters (SPF), that is, the survey with which the ECB collects analysts’ forecasts not only on rates, but on other crucial variables, such as inflation, real GDP growth and employment in the euro area, relating to a time period which may concern the current year or a longer term period.
The outcome of the latest survey was published by the ECB, based on the opinions of 61 economists and analysts have issued to the European Central Bank in the period between 18 and 21 March 2024, therefore following the second act of the ECB of 2024 and before the recent third act last Thursday, when Lagarde showed courage by deciding to distance herself from those doubts that have obscured the path of US fed funds rates.
Well, these economists – who, it is worth pointing out, do not reflect the expectations of the members of the ECB Governing Council, and who are essentially experts in financial institutions and not those based in Europe – they said they expect on average a decline in the rate on main refinancing operations (in English main refinancing operations -MROs) to 4.25% in the second quarter of 2024.
The outlook on the rate on main refinancing operations
To understand the forecast, it should be remembered that last Thursday the ECB has confirmed the rates on main refinancing operations, marginal lending operations and deposit facilities respectively at 4.50%, 4.75% and 4.00%after the last monetary tightening which dates back to the September 2023 meeting.
The rates on main refinancing operations – to which the survey refers – were therefore left unchanged at 4.5%.
This means that the economists and strategists who participated in the ECB survey they expect this rate to be cut by 25 basis points to 4.25% in the second quarter of 2024, therefore in the period between the months of April and June.
The outlook is in line with the forecasts of the markets and other analysts who, even before the last Central Bank meeting, were betting on a move in June, not even ruling it out the surprise of “an encore” by Christine Lagarde.
The same rates on the main refinancing operations (ORP in Italian) – which, we recall, they are those who are paid by banks for loans that they receive from the ECB for a period of one week – are estimated to fall to 3.5% by the fourth quarter of this year, and then decline further to 3% in 2025 and be cut further until 2.5% in 2026.
There will be cuts, but forget the era of zero or negative rates
All this implies that, between now and 2026, the ECB, according to experts, it is expected to cut the euro area’s cost of money by 200 basis points.
It is clear, from these projections, that interest rates in the euro area will be cut but also that, as has been said several times in recent years, the Eurozone will certainly not return to that era of zero rates or negative rates (for those on deposits) launched by former Prime Minister Mario Draghi.
Rates at zero and even below zero to which the current president of the ECB Christine Lagarde said enough, officially, in July 2022, irony of fate on the day of the end of the Draghi government in Italy when he kicked off the cycle of monetary restriction by declaring war on inflation in the euro area.
That day, with the first monetary tightening of what would be confirmed a record round of monetary tightening in the history of the European Central Bank, Lagarde raised interest rates on the main refinancing operations, on the marginal refinancing operations and on deposits at the central bank respectively at the 0.50%, 0.75% and 0.00%, effective from 27 July 2022, thus decreeing the end of the era of negative rates.
ECB experts’ forecasts on GDP and euro inflation
The experts consulted by the ECB did not focus only on the interest rate trend.
Estimates on inflation and on the unemployment in the euro area, as well as on the trend of the euro-dollar and oil.
In particular, regarding specifically expectations for HICP inflationeconomists said they expect headline inflation in the Eurozone to fall from 2.4% in 2024 to 2% for both 2025 and 2026, as in previous estimates, motivating the outlook with the still rigidity present in the labor market and with wage growth still considered “high”, albeit in moderation.
Core inflation – i.e. stripped of the more volatile components of energy and food prices – is also expected converge towards the ECB’s 2% target in the two-year period 2025-2026.
The Eurozone GDP is estimated instead growing by 0.5% in 2024, 1.4% in 2025 and 1.4% in 2026:
in this regard, the survey revealed that experts revised downwards by 0.1 percentage points the outlook for 2024, revising the target for 2026 upwards by 0.1 percentage points.
However, the forecasts for the 2026 GDP remain unchanged.
The survey generally revealed that the short-term outlook for GDP in the euro area is “a gradual strengthening of economic activity throughout 2024, supported above all by the growth of real wages”.
However, longer-term expectations for GDP remained unchanged at a growth rate of +1.3%.
The outlook on unemployment, euro and oil
The outlook of the experts who participated in the ECB survey did not stop there.
Communicate too estimates of the unemployment rate in the euro areaexpected to rise in 2024, to 6.6%, and then decline to 6.5% in 2026 and 6.4% in the longer term.
Economists also responded to questions relating to trends in oil prices and the euro-dollar relationship.
The EUR-USD exchange rate is estimated to rise from approximately $1.09 in the second quarter of 2024 to $1.12 in 2026, while the US dollar-denominated oil price trend was revised slightly upward to $82 per barrel for the second and third quarters of 2024.
The forecasts are then for a decline to $79 per barrel in 2025 and to 78 dollars per barrel in 2026.
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