ECB to hold rates through mid-2024 despite stalling economy – Reuters poll

By Prerana Bhat

BENGALURU (Reuters) – The European Central Bank will hold interest rates steady well into next year, with a majority of economists polled by Reuters sticking to forecasts the first cut will have to wait until at least July despite expectations of a euro zone recession.

Last month, the ECB left its deposit rate at a record high of 4.00% after raising rates for 10 consecutive meetings, and all 72 economists in a Reuters Nov. 8-13 poll agreed there would be no more hikes in the current cycle.

While financial markets currently expect an April rate cut, the latest Reuters poll suggests that is unlikely, especially after ECB President Christine Lagarde said last month “even having a discussion on a cut is totally, totally premature.”

Around a 55% majority, 40 of 72, predicted rates would stay at current levels though the middle of next year. The remaining 45% saw a cut sometime before the ECB Governing Council meets in July.

The results are similar to a survey last month where 58% expected no cut before the July meeting.

“It seems that not much has to happen to push the eurozone into recession,” wrote Peter Vanden Houte, chief euro zone economist at ING, noting that ECB has acknowledged growth has been weaker than it expected.

“But that doesn’t mean that the ECB is in a hurry to cut rates… We don’t expect any rate cuts before the summer of 2024.”

An earlier than expected rate reduction would likely require a recession deep enough to prompt easing even if inflation remains above the ECB’s 2% target.

Over 40%, 15 of 35 economists, predicted another contraction this quarter after a flash estimate showed the 20-member bloc’s economy shrank 0.1% in Q3, fulfilling the official definition of a recession. But the weakest GDP forecast provided for coming quarters was a modest -0.3%.

Indeed, asked what type of recession the euro zone might enter, a strong majority, 24 of 29 respondents, said it would be short and shallow. Three said long and shallow, one said long and deep and another said short and deep.

For now, the U.S. Federal Reserve is forecast to ease policy a little earlier than the ECB, by end-Q2, although most economists say the greater risk to their forecasts is that it moves later.

The ECB, which began raising rates several months later than the Fed, could weaken the euro and introduce unwanted imported inflation if it moved before the Fed.

In the meantime, price pressures were expected to remain sticky. Headline inflation, which the ECB targets at 2.0%, fell to a more than two-year low of 2.9% last month from a peak of 10.6% in October 2022. It was forecast to remain around where it is now in the first half of next year and average 2.7% in 2024.

Core inflation – stripped of volatile food and energy prices and a better gauge of underlying demand – was seen averaging 5.0% this year and 2.6% next.

The jobless rate was expected to rise only slightly to 6.7% from the current 6.5% by end-2024, the poll showed.

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