Danske Bank said on Friday it expected the European Central Bank to cut interest rates only twice this year, not three, while Barclays also abandoned the idea of a cut in July.
Markets currently show that traders are pricing in cuts of around 60 basis points, which would bring the ECB’s benchmark interest rate to around 3.4% by December.
Piet Haines Christiansen, Danske’s chief analyst and keen ECB watcher, said in a note that he expected a “policy reduction” in June, but nothing in September.
“We have revised our ECB rate trajectory for the first time in over 12 months and we now expect the ECB to make two rate cuts this year (June and December), and three cuts next year. next year. This will take the deposit rate to 2.75% by the end of 2025,” he said.
It’s the first time Danske has changed its forecast in more than a year and Christiansen said his team expected the ECB to reiterate its approach to monetary policy on a meeting-by-meeting basis based on the data. , beyond the month of June.
The staff’s updated projection for June is expected to suggest that economic and monetary policy remains broadly unchanged and we expect the rate cut to be framed as a step back from September’s “insurance hike” of the “last year,” Christiansen added.
A few months ago, markets were expecting at least five rate cuts in 2024, but traders have since revised those estimates due to stagnant inflation and some recent one-off wage deals that suggest the situation could remain unchanged.
Analysts at Barclays also changed their forecasts for the ECB late Thursday, due to “high uncertainty” around inflation and the faster-than-expected acceleration in economic activity.
“We now believe that the ECB Governing Council will act more gradually this year.
“We continue to expect 25 basis point reductions at each forecast meeting (June-Sept-Dec), but we no longer expect any reductions at the July non-forecast meeting,” they added, referring to to the fact that the ECB will not publish new economic projections in July.
Inflation is slowing, but growth across the euro zone is accelerating, which could limit the ECB’s room to cut rates.
Yields on two-year German bonds, most sensitive to changes in interest rate expectations, are trading around a six-month high above 3%, after rising nearly 70% since the start of the year.
Despite the shake-up in its forecasts, Barclays said it still expected cuts of 150 basis points over the life of the ECB’s rate cut cycle.
