ECB Cuts Interest Rates: More Reductions Coming In In 2024?

Is the age of high interest rates coming to an end? While rates don’t seem to fall so quickly as it was projected in the beginning of the year, the European Central Bank (ECB) as well as the Swiss National Bank (SNB) have started reducing their interest rates after a couple of years that saw borrowing costs rising to unprecedented levels.

In this article you will have the opportunity to learn more about the ECB’s interest rate policy and what do analysts forecast about it.

ECB Cuts Interest Rates

On Thursday June 6th, the ECB governing board convened to decide on monetary policy issues. After the meeting, the council announced its decision to cut interest rates by 25 basis points (bps), thus lowering borrowing costs for businesses and consumers. The decision was in line with analysts’ forecasts who had expected that the eurozone’s central bank would adjust its policy in order to stir growth in the bloc. This was the first time that the ECB lowered interest rates since 2019.

The ECB’s chair Christine Lagarde had to choose her wording carefully when she was asked by journalists if the bank would continue reducing interest rates. “Are we today moving into a dialing back phase? I wouldn't volunteer for that. Is the dialing back process underway? There's a strong likelihood.” Lagarde said with some analysts finding her message confusing.

The French once upon a time finance minister and head of the International Monetary Fund (IMF) said that “it is on the basis of the reliability, solidity, robustness and strength of our projections that we have made the decision to cut. We are not pre-committing to a particular rate path.”

According to the post-meeting statement, the ECB expects inflation to be higher this year and in 2025 than it was forecasting three months ago. It said inflation would come in at 2.5% in 2024 and 2.2% in 2025, up from its previous forecast of 2.3% and 2%, respectively.

What Do Analysts Say About ECB Interest Rate Policy

With the ECB removing the 'top level of restriction', as ECB Chief Economist Philip Lane said in an FT interview, market analysts try to evaluate how the euro bloc central bank could move in regard to interest rates.

ING: ECB Rate Cuts Policy To Unfold Slowly

In a report published on June 7th, ING economists said that the ECB started reducing borrowing costs, in line with market expectations, but added that the next rates cuts likely wouldn’t come as quick as anticipated some months ago.

“This is the first time the ECB has cut rates since 2019. However, the Bank also acknowledges that monetary policy will have to remain restrictive this year and that a back-to-back rate cut in July is very unlikely. With the economy improving, albeit only gradually, and inflation remaining somewhat volatile, the ECB can afford to tread carefully in its monetary easing cycle. It is important to note that this is not a recessionary situation in which the ECB must bring interest rates into stimulatory territory; this is merely a normalisation cycle,” they wrote in their note to investors.

Regarding the ECB’s future monetary policy, ING’s analysts see two further rate cuts in 2024, although they suggest that there is a significant chance we might get only one. “In any case, the deposit rate is likely to be brought down to 2.50%, presumably the neutral rate, by the end of 2025 and subsequently remain at that level for some time to come,” they noted.

Ifo Institute: Expect Future ECB Rate Reductions To Delay

The German Ifo research institute said further ECB rate cuts could be a long time coming. Ifo economists suggested that “the move [rate cut] makes sense, because inflation in Europe is now heading back toward the target of 2%. However, this interest rate cut has already been priced in on the markets, so the stimulus for the economy will be limited. In view of significant rises in wages and postponed interest rate cuts in the U.S., it is rather doubtful that further interest rate cuts will follow soon.”

Deutsche Bank Says Less Forward Guidance Than Expected

Economists at Deutsche Bank noted that higher than previously forecast CPI inflation figures could make ECB council members reconsider the trajectory of futures cuts.

“The statement arguably gave less guidance than might have been expected on what comes next. In that sense, the immediate tone is a ‘hawkish cut’. This is not a central bank in a rush to ease policy,” they noted in their report.

Pimco: Two More Interest Rate Cuts Likely in 2024

Pimco’s economists told The Guardian reporters that “the data flow over the coming months will decide the speed at which the ECB removes additional restrictiveness.”

Its market analysts suggested that “Given the ECB’s reaction function, we envision the ECB to keep cutting rates at staff projection meetings. September provides the next opportunity to holistically reassess the disinflation process. Contrary to earlier this year, market pricing seems reasonable and broadly in line with our long-held baseline of three cuts for this year. We expect additional cuts in September and December.”

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.