Poll: ECB to Cut 25 Bps in Sep and Dec Meetings
3min read According to a recent Reuters poll, a significant majority of economists expect the European Central Bank (ECB) to implement two 25 basis point (bps) rate cuts before the end of 2024, with one cut anticipated next week and another in December.
This strategy, if executed, would represent a cautious yet steady approach to monetary easing amid ongoing concerns about economic growth and inflation in the Eurozone.
Market Expectations and Poll Insights
The Reuters poll indicates that 64 out of 77 economists, or roughly 85 percent, predict that the ECB will cut rates by 25 bps at its upcoming meeting next week and again in December.
This consensus is a slight increase from the August poll, where 81 percent of economists anticipated two additional rate cuts for the year. The remaining respondents are divided: four expect just one more rate cut in 2024, while eight are forecasting three cuts across the remaining meetings.
From the perspective of market pricing, traders have almost fully factored in a 25 bps rate cut for next week, with a probability of around 99 percent. For the remainder of the year, the markets are currently pricing in a total of 60 bps in rate cuts, suggesting a belief in a more aggressive easing policy than the economists’ consensus.
Looking ahead to the first half of 2025, the market has factored in approximately 143 bps worth of rate cuts, implying nearly two-and-a-half rate cuts in the upcoming months.
Factors Influencing the ECB's Decisions
The decision-making process at the ECB is being shaped by a variety of macroeconomic factors. The central bank has been navigating a delicate balance between managing inflation and fostering economic growth.
Recent data has shown mixed signals, with inflation appearing to remain persistent, albeit at a slower pace, while economic activity in key sectors shows signs of softening. This dual mandate has created a challenging environment for the ECB as it seeks to calibrate its monetary policy response.
A significant part of the discussion has revolved around the pace and timing of these rate cuts. The ECB has three more meetings scheduled for this year: next week, October 17, and December 12. If the bank chooses to cut rates next week and again in December, it would suggest a pattern of easing roughly once every three months, potentially skipping the October meeting.
This approach would allow the ECB to assess the impact of its policy moves while maintaining flexibility to respond to changing economic conditions.
The Market's Take: A Tense Balancing Act
Market participants appear to be cautiously optimistic, as evidenced by the nearly full pricing in of a 25 bps cut next week.
However, the divergence between economists' expectations of two cuts and market pricing suggesting nearly two-and-a-half cuts for the rest of the year underscores the uncertainty that still prevails.
The slightly more aggressive market stance could be attributed to several factors:
1. Economic Data Volatility: The Eurozone economy has shown signs of volatility, with some sectors experiencing more pronounced slowdowns than others. This could compel the ECB to take a more aggressive stance on rate cuts to prevent further economic deceleration.
2. Global Economic Concerns: Broader global economic issues, including geopolitical tensions and supply chain disruptions, could create additional headwinds for the Eurozone economy. A more accommodative monetary policy could be viewed as a buffer against external shocks.
3. Inflation Trajectory: While inflation remains a concern, the ECB might interpret recent data as signaling a potential peak or stabilization, giving it more room to maneuver with rate cuts. If inflationary pressures are deemed manageable, further easing becomes more plausible.
Looking Ahead: What to Watch For
As the ECB approaches its next meeting, the focus will be on the central bank's communication strategy. Any forward guidance or signals about the pace and scope of future rate cuts will be closely scrutinized by investors and economists alike.
The ECB’s ability to manage market expectations while navigating economic uncertainties will be crucial.
The outcome of the upcoming meeting and subsequent rate decisions will likely depend on several upcoming data releases, including inflation figures, employment data, and manufacturing activity. These indicators will help shape the ECB’s outlook on the economy and influence its policy direction.
Conclusion
The ECB appears set to continue on a path of gradual monetary easing, with rate cuts likely to be spaced out over the remaining months of 2024. However, the central bank’s ability to balance inflation control with economic support remains a key challenge.
The evolving economic landscape and market reactions will play pivotal roles in determining the success of the ECB's strategy. Investors should be prepared for potential volatility as markets react to the central bank’s moves and further economic data releases in the coming months.