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European Central Bank officials are pushing back against investors’ bets that they will start cutting interest rates this spring, despite consumers’ increasing belief that the worst of eurozone inflation is over.
Consumer expectations for eurozone inflation have “declined noticeably” to their lowest level since shortly after Russia’s full-scale invasion of Ukraine triggered a surge in prices almost two years ago, according to an ECB survey published on Tuesday.
Economists said the change in expectations would be welcomed by the ECB as its officials looked for signs of whether price pressures would ease sufficiently to bring them down to its 2 per cent inflation target in the next year.
The data seemed to strengthen investor bets that the ECB would start cutting rates in April. The euro fell 0.6 per cent against the dollar and Germany’s 10-year bond yield dipped slightly on Tuesday after the survey results were published.
However, several members of the ECB governing council spoke out to question whether markets were being too optimistic ahead of their meeting next week to discuss monetary policy.
“It’s too early to declare victory,” French central bank governor François Villeroy de Galhau told the World Economic Forum in Davos on Tuesday. While the ECB’s next move was likely to be a rate cut, the timing was unclear, he said, adding: “The job is not done yet.”
Finnish central bank board member Tuomas Välimäki said the ECB should be careful not to jump the gun by cutting rates too early only for inflation to pick up again. “It’s better to wait a bit longer than doing a premature exit from this restrictive level, and then perhaps having to do a reversal,” he told Reuters.
German central bank head Joachim Nagel went further, saying: “The markets are from time to time, they are optimistic — maybe from time to time they are over-optimistic. It’s their view. I have a different view.” Speaking to Bloomberg TV in Davos on Monday, he added: “Maybe we can wait for the summer break or whatever [to decide whether to cut rates].”
Swap markets have priced in 1.5 percentage points of cuts in the ECB’s deposit rate next year from its current record level of 4 per cent, starting as early as April. Yet IMF deputy head Gita Gopinath said at a Davos event on Tuesday that markets were being “a bit premature” as rate cuts were “more likely in the second half of this year”.
Eurozone inflation has fallen from a peak of 10.6 per cent in October 2022 towards the ECB target over the past year, but it picked up again from 2.4 per cent in November to 2.9 per cent in December because of the phasing- out of government energy subsidies.
The ECB said its survey of consumers in November found their median expectation for inflation in the single currency bloc in one year’s time dropped from 4 per cent to 3.2 per cent, while their outlook for inflation in three years fell from 2.5 per cent to 2.2 per cent.
Tomasz Wieladek, an economist at investor T Rowe Price, said the decline was unexpected because Israel’s conflict with Hamas started in November and could have raised fears that energy prices could rise again.
“Normally, Middle East conflict should have led to a significant rise in medium-term expectations,” he said. “The fact that this didn’t happen is an indicator of very strong disinflationary forces shaping consumers’ inflation expectations.”
Speculation that the ECB would start cutting rates in the first half of this year helped to brighten investor sentiment about the outlook for the struggling German economy, according to a survey by the ZEW Institute.
ZEW president Joachim Wambach said more than half of the investors it surveyed expected the ECB to cut rates in the first six months of this year. That raised its index of expectations for conditions in six months’ time in the German economy from 12.8 to 15.2, its highest level for almost a year.
Source: Economy - ft.com
