The European Central Bank (ECB) is all but certain to deliver an interest rate cut on June 6, according to a poll of 82 economists, most of whom project further reductions in September and December.
But financial markets are pricing only two ECB rate cuts in 2024, a sharp pullback from six expected at the start of the year, presenting an uncommon situation where economic forecasters expect more rate reductions than traders.
Despite encouraging signs of inflation, a recent pickup in wage growth has raised questions over how fast the ECB may be able to lower rates. It has all but pre-announced a June cut through multiple hints from policymakers over recent months.
All 82 economists in a May 21-28 Reuters poll predicted the ECB would reduce its deposit rate by 25 basis points to 3.75% on June 6.
But debate over how much room the ECB has to cut has become more heated with the U.S. Federal Reserve remaining noncommittal on the timing of its first cut, now set to come in September at the earliest and priced for November by markets.
Still, an over two-thirds majority of those polled, 55 of 82, expected the ECB's Governing Council (GC) to cut twice more this year, in September and December. That was up from just over half in an April survey.
The majority view for three cuts in 2024 comes as some economists have scaled back their rate cut calls from 100 basis points or more this year. Only 22% now see the deposit rate at 3.00% or lower by the end of 2024, compared with nearly 40% last month.
"Faced with elevated uncertainty and activity accelerating faster than anticipated, we now think the GC will move more gradually this year," said Mariano Cena, senior European economist at Barclays.
"This would take place even if risks to the inflation outlook beyond this year are more symmetric and even potentially to the downside," said Cena, who recently shifted a follow-up cut in July to September.
Asked what was more likely for ECB rate cuts this year, nearly three-quarters of economists, 25 of 34, said fewer than they expected rather than more.
Of 77 common contributors in this and last month's surveys, over one-quarter, 20, now see fewer rate cuts.
The median of 35 responses to an additional question also showed the ECB, which hiked rates by 450 basis points between July 2022 and September 2023, would reduce the deposit rate by a modest 150 basis points in the upcoming cutting cycle to 2.50%.
But with wage growth expected to remain above 3% – the level the ECB sees as consistent with its 2% inflation target – until at least 2026, inflation could remain elevated for longer.
Inflation is expected to rise to 2.5% this month from 2.4% in April, a separate Reuters poll showed. It was not expected to fall to the target until Q3 2025.
"The ECB has recently put a lot of emphasis on wage growth coming down as a condition for rate cuts and the question is how much this unexpected increase will startle it ahead of the June meeting," said Bert Colijn, senior eurozone economist at ING.
"While the eurozone economy has been performing sluggishly for some time and inflation has fallen back toward the target faster than expected, enough uncertainty remains to not expect a traditional rate cutting cycle to emerge."
The eurozone economy, which grew a better-than-expected 0.3% last quarter, will also expand 0.3% this quarter and next, the poll showed. Economic growth was seen averaging 0.7% this year, an upgrade from the last poll.