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Economic experts suggest European interest rate cuts on the way

The European Central Bank (ECB) will have key data by June to decide on the first of a likely series of interest rate cuts.

The information was revealed in a recent interview by ECB chief economist Philip Lane, who also cautioned that going too fast may prove self-defeating.

As reported by Reuters, with inflation in the euro zone now seemingly under control, investors have been betting that the ECB will slash borrowing costs from record highs this year, starting possibly as soon as March.

In his interview Lane openly entertained the thought of a "sequence of rate cuts" but he emphasised that crucial wage data would only become fully available by the ECB's 6 June meeting -- confirming the timeline exclusively reported by Reuters in December.

"By our June meeting, we will have those important data," the Irish economist told Italian daily Il Corriere della Sera. "But let me emphasise, we do have other data that we will be looking at every week."

Money markets currently price in at least 150 basis points worth of cuts this year, taking the interest rate that the ECB pays on banks' deposits to 2.5%.

The ECB's rate rise in September was in part "an insurance" against inflation coming back, Lane said, adding this would be taken into account when the time comes to ease policy.

But he also stressed that cutting rates too fast could fuel a new wave of inflation, forcing the ECB to then raise rates even more.

"A false dawn, too rapid a recalibration, can be self-defeating," he said, as noted in the Reuters report on the interview.

Meanwhile, as reported by Bloomberg, a recent survey indicates that the ECB may cut interest rates four times this year, while also noting that economists still have more cautious view than investors

More specifically, according to a Bloomberg poll of economists, the European Central Bank will lower interest rates four times this year as inflation retreats more quickly than previously anticipated.

“The cuts, each of 25 basis points, are expected to kick off in June, with further reductions in September, October and December bringing the deposit rate to 3%. While that’s one more move than expected in last month’s survey, it’s still more conservative than the six, starting April, that investors are pricing,” the article noted.

The media oulet also reported that the ECB was currently on hold as it waits to see how the 10 hikes enacted since mid-2022 affect the economy. Policymakers are focusing particularly on wage developments in the first half of 2024, to confirm that rising labor costs won’t keep inflation from decelerating to the 2% goal.

“Economists now expect a faster retreat in price growth — to 2.3% in 2024. That’s a downward revision of 0.3 percentage point compared with December’s poll. They still see a bumpy path ahead as inflation re-accelerates from the target level in the fourth quarter to average 2.1% in 2025,” Bloomberg said.

It went on to note that such a scenario is in line with warnings from ECB officials, who’ve said last year’s dramatic slowdown won’t continue in 2024, partly because governments are phasing out aid meant to tackle the high cost of living.

“The core rate of inflation, which strips out volatile components including energy and food, is now seen lower this year, but slightly higher in 2025, remaining above the ECB’s goal at 2.2%. A recession in the second half 2023 is set to be followed by a gradual recovery that may gather speed over the course of this year, according to the survey. Growth expectations were kept stable for 2024 and raised by 0.1 percentage point for 2025,” Bloomberg reported.

(Sources: Reuters, Bloomberg)

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