European Central Bank policymakers cut their annual inflation and growth forecasts on Thursday as they confirmed a broadly expected hold on interest rates.
Expert forecasts now assume economic growth of 0.6% in 2024, after previously forecasting 0.8%.
They painted a more positive picture of inflation, raising the forecast for the year to an average of 2.3% from 2.7%. Looking ahead, staff expect inflation to reach the ECB’s 2% target in 2025 and cool further to 1.9% in 2026.
This appeared to reinforce market bets for interest rate cuts this summer, with the euro trading 0.35% lower against the British pound following the news. Expectations have shifted to the June meeting, although ECB staff emphasize that they want to evaluate wage data from the spring before making a decision.
“We are in the process of disinflation and making progress,” ECB President Christine Lagarde said during a press conference on Thursday.
“This makes us more confident, but not sufficiently confident, and we need more evidence, more data, and we know that data will be available in the next few months. We’ll know a little more in April and a lot more in June.”
Policymakers have repeatedly pointed out that May is a crucial date, as collective bargaining agreements are due to be published this month.
On the growth front, the ECB forecasts gross domestic product growth of 1.5% in 2025 and 1.6% in 2026 as eurozone economic activity emerges from its current stagnation. Germany, Europe’s largest economy, has already cut its growth forecast for 2024 from 1.3% to 0.2%.
With the ECB keeping interest rates at a record high since its September meeting, market participants are eagerly awaiting March forecasts for an indication of when rate cuts might begin.
The key interest rate is currently at 4%, up from -0.5% in June 2022, after being raised ten times.
Inflation in the euro zone fell from 2.8% in January to 2.6% in February, showing continued progress towards the ECB’s 2% target. However, the core figure, which excludes energy, food, alcohol and tobacco, proved to be more stable at 3.1%.
“Relatively reserved”
Antonio Serpico, senior portfolio manager at Neuberger Berman, said the most likely scenario would involve cuts starting in June and cuts of 25 basis points per session, for a total of 150 basis points or more this year.
“The numbers were actually pretty reassuring, we weren’t expecting a cut today,” he told CNBC’s Silvia Amaro.
“Today’s decision appears to be relatively dovish,” he said, given that both growth and inflation forecasts have fallen.
“This means that the Governing Council sees growth as more sluggish and lower than before… and also in terms of headline inflation and core inflation, the new forecasts are definitely weaker than the old ones.”
The main variable will be the persistence of core inflation due to a tight labor market, he added.
Core inflation forecasts were updated from 2.7% to 2.6% in 2024 and from 2.3% to 2.1% in 2025.
European bond yields were lower after the update, also a sign of increased interest rate cut expectations. The yield on 10-year German government bonds fell by 7 basis points.
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2024-03-07 14:13:35
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