Several European Central Bank (ECB) officials have come out in recent days casting doubt on market expectations for interest rate cuts in 2024. Comments from chief economist Philip Lane, policymakers Robert Holzmann, Gediminas Šimkus and others suggest the ECB is in no rush to ease policy further as inflation remains stubbornly high.
ECB Chief Economist Calls Market Bets “Too Fast”
In an interview published last Friday, ECB chief economist Philip Lane said financial markets may be getting ahead of themselves in betting on rate cuts this year[1]. Lane nominated the ECB’s June meeting as potentially key for deciding on the timing of rate cuts, based on fresh inflation and growth forecasts. But he cautioned against financial markets recalibrating too fast:
“There is a risk that the markets are pricing a sequence of events that is too fast compared to the sequence that we foresee ourselves,” Lane said.
His comments echoed other policymakers who have pushed back against expectations for rapid policy easing. Markets are currently pricing in around 50 basis points of cuts by year-end, with a 10 bp reduction as soon as March[2].
Holzmann Sees No Rate Cuts This Year
ECB Governing Council member Robert Holzmann went even further last week, saying he does not expect rate cuts at all in 2024[3]. In comments made at Davos, Holzmann warned “no one should really seriously bank” on cuts this year given inflation is still too high. Euro zone inflation remains well above the ECB’s 2% target at 9.2% in December.
“As long as the inflation outlook foresees inflation to be 5% and above at the end of 2023, there is no room for rate cuts,” Holzmann said.
Simkus Far Less Optimistic Than Markets on Cuts
Fellow policymaker Gediminas Šimkus also said last week he is “far less optimistic” than markets on the potential for rate cuts[4]. He told Bloomberg Surveillance that core inflation remains too high to consider easing.
“I really don’t think we are anywhere near to say that the inflation outlook is in line with our target,” Šimkus said. “So far less optimistic than the market.”
Šimkus sits on the rate-setting Governing Council as the head of Lithuania’s central bank. Comments from national central bank chiefs suggest a building pushback within the ECB against market expectations.
ECB’s Knot – Markets “Self-Defeating”
On Tuesday, Dutch central bank president Klaas Knot warned markets are at risk of being “self-defeating” with their bets on rapid rate cuts[5]. He told CNBC that if financial conditions ease too quickly, it could lead to higher inflation.
“If monetary and financial conditions become too optimistic relative to actual data, they may turn out to be self-defeating,” Knot said.
Markets pricing in rate cuts could loosen demand before underlying inflation pressures fully abate. That could force the ECB to tighten policy again, which Knot described as an “inefficient” outcome.
Next Move Is Rate Cut But Timing Uncertain
Despite growing pushback, many ECB officials maintain the next policy move will indeed be a rate cut amid prospects for a euro zone recession this year. Last week, Executive Board member Francois Villeroy de Galhau said the next move is lower but the timing remains an “open question”[6].
ECB surveys point to 100 basis points of cuts priced in by end-2024[7], suggesting markets remain more aggressive. But policymakers are increasingly looking for a deterioration in underlying inflation pressures before acting.
Centeno, Others Flag Cuts if Needed
In contrast to the pushback, Portuguese central bank chief Mario Centeno said last week he would not exclude rate cuts this year[8]. Along with several others, Centeno maintains cuts are possible if the growth and inflation outlook deteriorates.
“If inflation starts moving back decisively to our 2% target, I would say we are not excluded from discussing moves down the road, potentially this year,” Centeno told Bloomberg TV.
The mixed signals suggest a lively debate within the ECB, with hawks and doves battling to influence expectations. June’s policy meeting and updated staff projections could prove pivotal in settling the debate one way or another.
Conclusion: Cuts Still Likely But Later Than Markets Expect
In all, recent comments point to growing resistance within the ECB against financial market bets on rapid policy easing. Several key officials have come out pushing back against expectations, warning tighter policy may still be warranted.
But with a euro zone recession still in the cards, some degree of policy support later this year looks likely. Markets are getting ahead of themselves on the timing, but cuts by year-end cannot be ruled out if the economy and inflation outlook deteriorate sufficiently.
The June meeting promises to be a key decision point when new ECB forecasts provide an updated inflation and growth trajectory. For now, policymakers seem intent on talked down expectations, wary of loosening financial conditions too soon while inflation remains well above target. But they may find it hard ignore deteriorating real economy data as 2024 progresses.
Table 1: ECB Policymaker Views on 2024 Rate Cuts
| Policymaker | Country | View on Cuts This Year |
|---|---|---|
| Philip Lane | ECB Chief Economist | Possible but too early for markets to price so aggressively |
| Robert Holzmann | Austria | Very unlikely given still high inflation |
| Gediminas Simkus | Lithuania | Far less optimistic than markets on cuts |
| Klaas Knot | Netherlands | Risk of markets being self-defeating |
| Francois Villeroy de Galhau | France | Next move likely cut but timing uncertain |
| Mario Centeno | Portugal | Would not exclude cuts if inflation falls decisively |
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