European Central Bank policymakers on Thursday cut their annual inflation and growth forecasts as they confirmed consensus expectations for no change in interest rates.
Staff now expects economic growth in 2024 to be 0.6%, compared with the previous forecast of 0.8%.
They took a more positive view on inflation, raising their average rate this year to 2.3% from 2.7%. Looking ahead, staff expect inflation to reach the ECB’s 2% target in 2025 and cool further to 1.9% in 2026.
This appeared to increase market bets on interest rate cuts this summer, with the euro falling 0.35% against the pound following the news.
In terms of growth, the European Central Bank expects gross domestic product to grow by 1.5% in 2025 and 1.6% in 2026 as economic activity in the euro area emerges from the current stagnation. Germany, Europe’s largest economy, has lowered its 2024 economic growth forecast to 0.2% from the previous 1.3%.
With the European Central Bank keeping interest rates at historically high levels since its September meeting, market participants have been eagerly awaiting March forecasts to learn when rate cuts might begin.
After ten rate hikes, its key rate is now 4%, up from -0.5% in June 2022.
While ECB staff have stressed they want to review spring payroll data before making a decision, expectations have already shifted to the June meeting.
Eurozone inflation fell to 2.6% in February from 2.8% in January, indicating continued progress towards the European Central Bank’s 2% target. However, the core figure, which excludes energy, food, alcohol and tobacco, proved stickier at 3.1%.
“Relatively dovish”
Antonio Serpico, senior portfolio manager at Neuberger Berman, said the most likely scenario is to cut interest rates starting in June by 25 basis points per meeting, for a total of 150 basis points or more this year.
“The numbers are actually quite reassuring, we didn’t expect any cuts today,” he told CNBC’s Silvia Amaro.
“Today’s decision looks relatively dovish” given the downward revisions to both growth and inflation forecasts, he said.
“This means that the ECB Governing Council sees slower and lower economic growth than previously seen… and the new forecast is certainly weaker than the old forecast in terms of both headline and core inflation.”
Core inflation forecasts were updated from 2.7% to 2.6% in 2024 and from 2.3% to 2.1% in 2025.
European bond yields fell after the update, also signaling increased expectations for rate cuts. German 10-year bond yields fell 7 basis points.
