2024-09-15 04:00:39
The Eurozone is entering a new era, more favorable for the economy and business, after the second interest rate cut by the ECB at Thursday’s meeting.
Without closing the door on a rate cut next month, euro zone policymakers are leaning more towards a December meeting for their next move, with Germany and France aligning for the first time in two years in an optimistic stance on tapering of inflation and interest rate cuts. With the main catalysts being the slowdown of the economy and the de-escalation of inflation, the big question is how far the reductions in interest rates will reach to be able to bring the desired effect, given of course that there will not be some unexpected development or a new crisis.
The interest rate cuts that began in June will of course have an increasing effect on borrowers and new bank lending as they continue. Lending has bogged down and European banks are expected to issue the fewest mortgages in 10 years this year.
Analysts estimate that the ECB’s key interest rate would need to be cut five times, by 25 basis points each, to have any benefits, and on today’s data it is most likely that the reduction in mortgage payments will start in 2025 and be completed in the same year, depending on the level at which the key ECB interest rates will stabilize. The level analysts and economists see ECB interest rates reaching through the second half of 2025 is in the range of 2% to 2.5%, with executive board member Isabelle Schnabel pointing out that further reductions from this will be difficult.
Of course, much will also depend on the intentions of the Federal Reserve, which is expected to take the first step toward easing next week, without a super-jumbo cut of 50 instead of 25 basis points completely off the table. in view of the November 5 elections. The most likely scenario, however, according to Bloomberg economists, is a cut of 25 basis points next week, as well as corresponding cuts at each of the two meetings that follow until the end of the year.
Although the ECB avoided any clarification on what will happen next, the president, Christine Lagarde, the day after the meeting was quick to clarify that the central bank is open to considering another interest rate cut in October if the economy takes a serious hit. According to Bloomberg, the statement is the clearest indication yet that policymakers are leaning toward waiting until December for the next move. Sources cited by Bloomberg say it would take a much more severe economic slowdown or aggressive easing by the Fed to get the ECB off its pace of quarterly cuts.
However, since December is still a long way off and a lot can happen in between, the ECB is trying to keep all options open.
The slowdown in inflation in August is an “ally”.
Eurozone inflation rose to 2.2% in August, the slowest pace since July 2021, and the ECB expects it to ease to 2% by the final quarter of 2025, after picking up slightly early next year.
Accordingly, growth slowed to 0.2% in the second quarter, with heavy industry and construction taking a big hit.
At the same time, lending in the Eurozone is expected to show no growth at all this year, falling 4.9% from 2022 levels, according to EY, based on data from the European Banking Authority. Also, business lending shrank 0.1% last year and is expected to rise just 0.5% this year, according to the same data.
From Budapest, where she is attending the informal meeting of the Eurogroup and ECOFIN, Lagarde also responded to accusations from Rome that yesterday’s rate cut was not bold and therefore unable to support the economy, saying the ECB is an independent institution not subject to to political pressures.
Italy’s foreign and industry ministers criticized the ECB for not cutting its key deposit rate by 50 basis points and it is only natural that Italy, which has the highest borrowing costs in the Eurozone and the second highest debt-to-GDP ratio, would benefit most from a sharp reduction in interest rates.
A change of attitude from the “hawks” of the central banks
On the wavelength of the press conference given by Lagarde on Thursday, the rest of the ECB officials also aligned, with the “hawks” having made a noticeable turn. The fact that the ECB’s two largest shareholders, the governors of the central banks of France and Germany, expressed their confidence in the prospect of lower inflation and interest rates is also telling.
Bundesbank hawk Joachim Nagel admitted that price trends are positive, calling the outlook very good. For his part, French central banker Villeroy de Gallo said that monetary policymakers should expect “gradual” rate cuts and the pace should be entirely realistic. “We are not pre-committing to a predetermined monetary policy path, keeping all options open at the next meetings,” he said. Villeroy went further, however, saying the direction of travel is clearly rate cuts, albeit at a pace dependent on upcoming statistics.
Martins Kazaks of Latvia underlined that the possibility of a cut in October is not high, but if there is an unexpected blow to the economy and it turns out to be much weaker than expected, with inflation decelerating significantly, then – he said – we could let’s think about a reduction. Markets place the probability of a cut in October at 25%. Lithuania’s Gedimikas Simkus said “strategic patience” is needed, with interest rates continuing to cut, just the pace of cuts will depend on the data. He characterized as a key uncertainty the inflation of services.
For the “chief hawk”, Austria’s Robert Holzmann, there is room for another decline in December, which means there may not be enough additional data for a move in October, as he told the FT in an interview. Luxembourg’s Gaston Rines said the ECB is likely to cut interest rates several times if the price outlook proves accurate.