Investing.com — The European Central Bank may have “set up” the expectation that it will lower interest rates down from record high levels at its upcoming meeting next week, but it remains unclear what officials will do later this year, according to analysts at ING.
Spurred on by data showing inflation in the euro zone slowing toward the ECB’s 2% target, policymakers have widely been signaling that they will slash its benchmark deposit rate by 25-basis points at its June gathering. The figure currently stands at an all-time high of 4% following a period of policy tightening aimed at corralling price gains.
Earlier this week, Chief Economist Philip Lane seemed to back a reduction in rates, telling the Financial Times in an interview that “barring major surprises” the economic data provides enough evidence to justify removing “the top level of restriction.”
French central bank chief Francois Villeroy de Galhau also told Germany’s Boersen Zeitung that the ECB has room to ratchet down rates, but said it has “several degrees of freedom” regarding any possible subsequent cuts.
The ECB will have the chance to pour through fresh inflation numbers from the euro zone on Friday, with economists predicting that prices rose at a slightly faster annual rate in May compared to the prior month. Last week, ECB President Christine Lagarde declared that she was “really confident” inflationary pressures were “under control.”
The ING analysts argued that while a cut in June appears to be a “done deal,” Lagarde’s confidence “might have been a premature.”
“In fact, incoming inflation data since the start of the year has been slightly stronger than anticipated, mainly due to the service sector, and at least in the coming months inflation could come in somewhat higher than the ECB had projected,” they said in a note.
The analysts added that developments around wages — a major influence on broader price pressures — will be “crucial.” Wage growth touched almost record levels in the euro zone at the start of 2024, although the ECB said this was due partly to one-off factors.
A reignition of inflation remains a risk, the ING analysts said, noting that prices in the U.S. — typically a leading indicator for the euro area — are “on an upward trend again.” As a result, they argued, the path for the ECB beyond June “is anything but clear.”
“Any signs of reflation and also stronger economic activity would limit the ECB’s room for manoeuvre,” the ING analysts said. “This is why we expect a hawkish cut next week and an ECB that will, at least at the press conference, try not to give any forward guidance.”