Economy

ECB seen delivering first rate cut in April instead of July - analyst

Move will be followed by consecutive cuts in each policy meeting until January 2025, Barclays bank predicts

Christine Lagarde, president of the European Central Bank. Photograph: Alex Kraus/Bloomberg

Fri Dec 15 2023 - 07:06

The European Central Bank (ECB) will deliver its initial rate cut of 25 basis points in April next year, followed by consecutive cuts in each policy meeting until January 2025, Barclays economists said in a note dated December 14th.

They had earlier expected that the ECB would start cutting rates only from July next year.

The ECB on Thursday pushed back bets of imminent interest rate cuts by reaffirming that borrowing costs would remain at record highs, despite lower inflation expectations.

As expected, the central bank left borrowing costs unchanged, but did not hint at a possible reduction.

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Barclays said that the rate cutting cycle beginning in April through January 2025 should take the deposit rate to a terminal rate of 2.25 per cent.

It projects that a pessimistic growth outlook than that of the ECB and inflation cooling at a faster pace should prompt the central bank to cut rates sooner.

“As inflation decelerates and the output gap becomes more negative, the policy stance becomes even more restrictive,” said Mariano Cena, economist at Barclays.

“For this reason, we think that it would not be hard to find a consensus among GC (governing council) members to cut policy rates faster toward neutral if the starting date were to be pushed later.”

The European Central Bank has signalled it still has “work to be done” to tame price pressures after leaving interest rates unchanged, even as it cut its inflation forecasts for this year and 2024.

ECB president Christine Lagarde pushed back against market expectations for it to cut rates as early as March, saying “we should absolutely not lower our guard” against inflationary pressures.

The central bank’s decision on Thursday came as investors ramped up their bets that major central banks are getting closer to lowering borrowing costs, following signals from US Federal Reserve officials that they expect to cut rates more aggressively than previously planned next year.

Meanwhile, Goldman Sachs expects the Bank of England (BoE) to deliver its first rate cut in June compared to a previous expectation of a first cut in August, after the Monetary Policy Committee (MPC) voted 6-3 to keep rates at a 15-year high of 5.25 per cent on Thursday.

“We expect the MPC to cut at a 25bps per meeting pace until policy rates reach 3 per cent in June 2025,” Goldman Sachs economists said in a note. – Reuters

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