Market News

BY  Alexander Weber, Bloomberg News

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(Bloomberg) -- The European Central Bank won’t wait as long as previously forecast to cut its interest rate, with the first reduction now anticipated in the second quarter, Goldman Sachs economists said. 

The US investment bank changed its prediction in a report on Thursday, hours after data showed that inflation in the region weakened markedly toward the 2% goal targeted by policymakers. Economists including Jari Stehn previously expected a move in the third quarter.

“While we see a significant hurdle for rate cuts before Q2, the risks around our baseline are clearly skewed towards a faster cutting cycle if inflation continues to slow more quickly than expected or if growth fails to improve next year,” the analysts wrote. 

The change aligns their view more to that of investors, who have now fully priced in a reduction in April despite the insistence by many ECB officials that borrowing costs should stay high for a while. 

The data on Thursday were the most marked piece of evidence so far that the backdrop for prices is rapidly turning. Inflation came in at 2.4% in November, less than half its pace as recently as August, and the third outcome in a row that was lower than economists anticipated.

Other forecasters also signaled that the new data may trigger a reappraisal of the outlook for prices and monetary policy. 

“It makes us wonder whether we are moving fast to the old lowflation equilibrium, which we have been flagging as a more likely scenario than inflation higher forever,” Bank of America analysts led by Ruben Segura-Cayuela said in a report. “And it makes us wonder whether June 2024 could be too late for the ECB to start cutting rates.”

What Bloomberg Economics Says...

“The ECB has increased borrowing costs well beyond any estimate of neutral. That’s becoming increasingly obvious in the economic data and the impact is also being seen in inflation. The story is similar on the other side of the Atlantic and the global mood music is changing. Any one of those three developments could cause the ECB to cut before the middle of next year, let alone some combination of them.”

—David Powell and Jamie Rush. For the full report, click here

At Deutsche Bank, economist Marc de Muizon calculated that, based on Thursday’s print, the current pace of underlying price growth has already fallen below 2% — much sooner than implied by the central bank’s forecasts.

“On its own, the latest inflation data increases the risks of the ECB easing sooner and faster than expected,” he said in a report.

Aside from the consumer-price numbers, the Goldman economists based their new forecast on a bigger fiscal drag in Germany hurting the euro-zone economy, and evidence that the labor market is slowing. 

“That said, we still look for a gradual cutting cycle,” they wrote, observing that the region’s growth should still improve next year, and measures of wage increases are still “firm.”

While the ECB’s upcoming meeting on Dec. 14 will feature new forecasts that could lay the groundwork for a shift in view, hawkish officials don’t seem ready for that. Bundesbank President Joachim Nagel insisted on Thursday, after the release of the data, that inflation risks are “skewed to the upside.”

By contrast, Bank of Italy Governor Fabio Panetta, a longstanding dove on the Governing Council, warned his colleagues not to keep rates high for too long. 

“Disinflation is well under way,” he said on Thursday. “We need to avoid unnecessary damage to economic activity and risks to financial stability, which would ultimately jeopardize price stability.” 

(Updates with more economists, starting in sixth paragraph)