(Bloomberg) -- The European Central Bank won’t lower interest rates as soon or as quickly as investors think, according to a Bloomberg survey of economists that suggests policymakers will push back against current market bets.
Officials will maintain borrowing costs for a second meeting on Dec. 14 and keep them there until June, when they’ll make the first of three quarter-point cuts in 2024, respondents said. They’d previously anticipated an initial move in September.
The new timetable is still later than financial markets are pricing after inflation in the 20-nation euro zone sank far more quickly than expected — a retreat that hawkish ECB Executive Board member Isabel Schnabel called “remarkable.”
Investors see almost 150 basis points of cuts next year, kicking off as early as March. Economists only predict reductions in September and December, after June.
The shift in market wagers leaves President Christine Lagarde and her colleagues facing a balancing act over communications. With the region teetering on the edge of a recession, they’ll probably shy away from firm commitments on where rates are headed.
“The ECB will likely want to push back, at least to some extent, on the recent dovish turn by the market, also as it risks unwinding some of the policy tightening,” HSBC economist Fabio Balboni said. “But it seems unlikely it will want to resort to strict forward guidance for the timing of the first rate cut.”
Some officials have already offered resistance to talk of loosening. Hours before the blackout period preceding next week’s gathering began, Slovak central bank Governor Peter Kazimir called expectations for a reduction in the first quarter “science fiction.” Latvia’s Martins Kazaks, meanwhile, said no such move is needed in the first half of 2024 under the existing economic outlook.
What Bloomberg Economics Says...
“The Governing Council will probably discuss a change of timing for winding down its Pandemic Emergency Purchase Programme, the sharp changes in market pricing for the ECB’s policy rates and the staff economists’ fresh forecasts.”
—David Powell, senior euro-area economist. Click here to read the full preview.
Those assumptions are about to receive an update, however, when the ECB presents new projections alongside its decision on rates. Respondents expect growth and inflation predictions to be trimmed for this year and next, and left unchanged for 2025. In 2026 — appearing in the forecasts for the first time — consumer-price gains are seen meeting the ECB’s 2% target.
“The sheer scale of the recent inflation undershoot of ECB projections at the headline and core level will force the Governing Council to acknowledge greater-than-expected progress in its fight against inflation,” said Oliver Rakau, an economist at Oxford Economics.
Nomura economist Andrzej Szczepaniak expects the new outlook to show inflation moderating below 2% sooner than currently foreseen, meaning officials “can’t credibly be very hawkish.”
“But they’ll have to lean firmly enough against market pricing for cuts already in January and March,” he said. “Ultimately, markets have run away with the fairies.”
Those surveyed appear confident that the ECB will get its timing right, with a majority saying it will neither cut borrowing costs too soon nor too late.
A majority now also reckons the pace of balance-sheet reduction will be quickened by ending reinvestments under the €1.7 trillion ($1.8 trillion) pandemic bond portfolio sooner than planned. Of the two-thirds of respondents expecting that outcome, most see roll-offs starting in the second quarter.
Lagarde has acknowledged that the ECB may revisit its guidance on PEPP, which envisages maturing securities being reinvested through end-2024. An earlier start to rate cuts may affect the timetable, as the two measures risk sending conflicting messages to investors.
“Although the ECB is done hiking rates, its likely next move may see it moving forward the date from which PEPP starts winding down, so technically the ECB must remain in a tightening mode as concerns official communication,” said Dennis Shen, senior director at Scope Ratings.
“To avoid any confusion in markets as to whether it’s tightening or loosening, the ECB will need to ensure its communication signals markets shouldn’t anticipate near-term rate cuts,” he said.
--With assistance from Jana Randow.
©2023 Bloomberg L.P.