ECB Anticipated To Commence Interest Rate Reductions In 2024

Economists predict ECB to reduce interest rates in Q2 2024, influenced by declining inflation rates.

When will the ECB likely start cutting interest rates?

A cohort of economists, polled by the Financial Times, project that the European Central Bank (ECB) will initiate a decrease in interest rates by the second quarter of 2024, influenced by a decline in inflation rates.

The recent deceleration in the euro area's inflation to 2.4% in November, a marked decline from its previous year's peak, has fostered expectations for the ECB to adjust borrowing costs downward. This anticipated change, aligning closely with the ECB's 2% target, reflects a nuanced understanding among economists of the inflationary trajectory. Notwithstanding, some experts like Fritzi Köhler-Geib of KfW forecast transient dips in inflation, suggesting a fluctuating pattern around the 2% mark.

ECB HQ in Frankfurt, Germany
ECB HQ in Frankfurt, Germany

Market Expectations And Monetary Policy Challenges

Investor anticipations diverge somewhat from these expert projections, with a significant portion expecting rate cuts as early as March 2024. This disparity underscores the complex decision-making landscape the ECB navigates, balancing the imperative of sustaining credibility and responding effectively to economic shocks. TS Lombard's Davide Oneglia warns of the risks associated with delayed rate reductions, highlighting the potential harm to the ECB's credibility.

ECB's Historical Rate Responses And Economic Implications

The ECB's recent history has seen a dramatic shift in its deposit rate, reaching an unprecedented 4% in response to consumer price surges. This aggressive stance has sparked debate among economists about the potential for overtightening and its impact on the euro area's economic fabric. Stefan Gerlach, formerly of Ireland's central bank and now at EFG Bank, points to the risk of the ECB having overestimated the eurozone's economic robustness.

Central Banks Adapt Post-Inflation Surprises
Post-inflation surprises prompt central banks to overhaul their economic forecasting methods.

Forecasting The Path Of ECB Rate Adjustments

Looking ahead, economists offer varied timelines for the ECB's rate cuts, with a consensus forming around a gradual reduction to approximately 2.25%. The debate continues over the ECB's past actions and their impact on its credibility, with opinions split between those who view its reputation as intact and others who see it as somewhat tarnished.

Broader Economic Concerns And Fiscal Stability

The analysis also touches on broader economic issues, such as the effect of energy prices on inflation and the limited impact of interest rate hikes on aggregate demand, as noted by IESEG School of Management's Eric Dor. With EU government debt levels reaching new heights, economists largely dismiss the likelihood of significant financial crises, as indicated by bond yield spreads. Katharine Neiss of PGIM Fixed Income even predicts a potential narrowing of these spreads in 2024.

The Euro Area's Fiscal Future And Emerging Risks

As the EU tightens its fiscal rules, economists like Sandra Phlippen of ABN Amro express concerns over debt sustainability amid a shift towards austerity. This evolving fiscal landscape poses new risks and challenges for the euro area economy, marking a critical juncture in its financial trajectory.

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