The European Central Bank (ECB) is anticipated to cut its growth and inflation forecasts but leave interest rates unchanged at its upcoming meeting in Frankfurt this Thursday, analysts have said.
Analysts predict the ECB will keep all three of its key interest rates unchanged, despite signs of progress in its fight against rising prices, as it waits for clearer evidence that inflation has started to drop.
The upcoming meeting is expected to see the ECB lower its growth and inflation forecasts for the European Union’s economy, in a sign its policies have started to work as high borrowing costs take their toll on the European economy.
Morgan Stanley’s analysts expect the ECB will cut its GDP growth guidance for 2023 down from the 0.7% figure it put out at its September meeting to 0.5%. The bank also expects the ECB will lower its 2024 guidance from 1.0% to 0.8%, while leaving its 2025 forecasts unchanged.
The ECB is also set to lower its inflation forecasts, in cutting its forecast for inflation this year by a tenth to 5.5%, and trimming next year’s inflation forecast to 2.9% from 3.3%.
The central bank is, however, expected to leave interest rates unchanged as it remains wary of acting too quickly, despite the positive signals, even as financial markets have already begun to price in the prospect of sharp interest rate reductions.
“The fear for central banks is that a lot of the slowdown in inflation has been driven by the recent slumps in crude oil and natural gas prices and could well be transitory in nature, and with wage inflation still elevated will be reluctant to signal the ‘all clear’ too soon,” Michael Hewson at CMC Markets said.
This would see the keep interest rates on bank deposits stable at 4%, after they were lifted to record highs in September via a series of 10 consecutive hikes.
“Despite all the good news on the inflation front, the ECB is likely to remain cautious,” Morgan Stanley analysts led by Jens Eisenschmidt said.
Instead, the ECB is expected to start signaling that interest rates have now peaked as it seeks to temper enthusiasm around the possibility of interest rate reductions.
In an interview with Reuters on Dec. 5, ECB executive board member Isabel Schnabel, signaled the central bank’s reluctance to lower interest rates too quickly, in stating: “Despite these positive developments, I still believe that we must not declare victory over inflation prematurely.”
The German economist, who is seen as one of the most influential voices in the Conservative camp of the ECB, also seemed to rule out the possibility of more hikes, in stating: “A further rate increase is rather unlikely.”
Financial markets are now anticipating around 135 basis points worth of cuts in 2024 and a further 40 basis points of reductions in 2025, data from investment bank Nomura shows.
