ECB Rate Cuts Enter Final Stretch With Divisions Widening
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ECB Rate Cuts Enter Final Stretch With Divisions Widening
Alexander Weber and Mark Schroers
4 min read
(Bloomberg) -- The European Central Bank is nearing the final leg of its interest rate-cutting cycle with internal divisions set to complicate decision-making over the months ahead.
Thursday’s widely anticipated decrease in the deposit rate to 2.5% is likely to be the last such step that the ECB’s 26 policymakers can easily agree on. Squabbling over how much further to push — and how quickly — is already under way.
That’s because borrowing costs are now approaching levels where they may no longer restrain the euro zone’s sluggish economy — prompting some to warn against loosening too much. There are other reasons for caution. A US trade tariffs could harm the region’s growth prospects, while a peace deal in Ukraine — distant as that prospect may look at this stage — could improve them dramatically.
“The increasing controversies certainly don’t make it any easier to agree on further rate cuts, and it may lead to the pace being slowed down somewhat,” said Jari Stehn, chief European economist at Goldman Sachs. “A pause in April seems possible, but a further cut is still likely.”
Analysts polled by Bloomberg also see the outlook becoming less certain. While they almost unanimously forecast a reduction in rates this week, about a quarter sees no change in April. Investors are equally on the fence for that month.
The run-up to March’s policy meeting has seen hawks on the ECB’s Governing Council start to challenge the base case among economists that the deposit rate is on a smooth path to 2% by mid-year.
Executive Board member Isabel Schnabel said she’s not sure that policy is still restrictive, while Belgium’s Pierre Wunsch urged officials not to “sleepwalk to 2% without thinking about it” and Bundesbank President Joachim Nagel said it’s best “not to rush” into further cuts.
Those of a more dovish mindset don’t look like bending. Bank of France Governor Francois Villeroy de Galhau said “we could be at 2% this coming summer” and Schnabel’s Executive Board colleague Piero Cipollone cited the ECB’s parallel unwinding of past stimulus measures as a reason to ease more aggressively.
In one possible concession, Greece’s Yannis Stournaras said officials may only make the final two rate cuts by the autumn, implying a pause along the way.
The ECB still sees inflation meeting its 2% goal in 2025, with prices cooling in February. While the headline number slightly overshot estimates as it retreated to 2.4%, services prices, which have been advancing at an uncomfortable pace of about 4% for more than a year, eased to 3.7%.
The ECB has long predicted an eventual slowdown as wage increases abate. Proof that such a moderation is materializing will perhaps carry more weight in the coming months, according to Moody’s Analytics economist Kamil Kovar.
“In April and potentially in June, the ECB could be more data-point dependent,” he said. “If inflation prints ahead of the April meeting come in hot, then a cut is not going to happen. If they come in soft, it’s going to happen.”
What Bloomberg Economics Says...
“The ECB will almost certainly lower rates again on March 6. However, resistance to additional monetary easing after that is building. The most interesting aspect of the Governing Council’s upcoming gathering will probably be any hints that are provided on what comes next – the April decision will be finely balanced, but we expect a pause.”
—David Powell, senior euro-area economist. Click here to read full preview.
Another question is whether US President Donald Trump delivers the tariffs he’s threatened on European goods. Lacking details, the ECB has been coy about calculating any potential impact, though it’s acknowledged that growth would take a hit.
The consequences for inflation are less clear. But, at least in the longer term, upward pressures could prevail, said Lena Komileva, chief economist at G Plus Economics.
“The euro zone faces a new stagflationary shock in the form of trade wars at a time when policy space is limited and political will fragmented,” she said. “The ECB has little room for policy error.”
Compounding matters is the prospect of a ramp-up in fiscal spending — especially on defense — after Trump made it clear the US will no longer guarantee Europe’s security. EU leaders will be discussing their options in Brussels on Thursday at the same time the ECB sets policy in Frankfurt.
But while that could drive bond yields as supply increases, any inflationary impact looks some way off. That’s because military outlays produce different economic effects than expenditure specifically designed to stimulate activity — partly because money flows to companies abroad, and also because it won’t arrive overnight.
On balance, and considering recent slowdowns in inflation and wages, “you can well make an argument for another cut in April,” said Peter Schaffrik, Global Macro Strategist at RBC Capital Markets. “But somewhere between 2.5% and 2%, the voices demanding a pause will become louder.”
