ECB rates: Here’s how much Frankfurt will cut according to Schroders

Investing.com – "Regarding the European Central Bank, our estimates predict that the first cut will occur during the June meeting, followed by three more cuts of 25 basis points each by the end of the year," forecasts Azad Zangana, senior European economist & strategist at Schroders on the ECB's upcoming monetary decisions.

The Eurozone's economy has started to grow again

After a brief technical recession in the second half of 2023, the Eurozone returned to growth in the first quarter of this year. "Real GDP grew by 0.3% compared to the previous quarter, with growth also rebounding in Germany. Italy (0.3%) and Spain (0.7%) both exceeded consensus forecasts, and France (0.2%) also saw a slight improvement," Zangana highlights.

According to the manager's view, the prospects for the Eurozone remain largely unchanged: "A combination of lower inflation and easing monetary policy should support the recovery in demand. However," Zangana adds, "the structural shift towards higher domestic energy and labor costs suggests that Europe will benefit less from the global trade recovery than in the past."

Nevertheless, Schroders believes the economies of the Eurozone countries could positively surprise the markets. "Our estimates for Eurozone GDP growth have been revised upwards from 0.7% to 0.9% for 2024 and remain unchanged for 2025 at 1.8%. These are more optimistic forecasts compared to the consensus, which is 0.6% and 1.4%, respectively."

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Stickier than expected inflation

Inflation has proven to be stickier than analysts previously expected, "partly due to the effects of energy prices, as governments have phased out energy subsidies and geopolitical events in the Middle East have driven up oil prices," Zangana notes.

Overall, inflation fell to 2.4% year-on-year in April from 2.8% three months earlier. "We have raised our inflation estimates from 2.1% to 2.3% for 2024. Although the drop in wholesale gas prices has led us to reduce our forecast for 2025 to 2.4% from the previous 2.8%, it is worth noting that our forecast is higher than the consensus estimate of 1.9%," the expert reveals.

Two more cuts in 2025 and then steady rates

Based on these figures, Schroders expects that, after four cuts in 2024, "the ECB will make another two cuts of 25 basis points in the first quarter of next year, and then remain steady for the rest of 2025. The pause will likely be forced by the reemergence of inflationary pressures," adds Zangana.

"With the recovery in domestic demand and growth returning above trend," he argues, "the lack of unused production capacity, particularly in labor markets, should push wage inflation higher, forcing businesses to raise their product prices."

As the economist points out, "although the Eurozone is emerging from a cyclical contraction phase, unemployment rates have remained near decade lows." This dynamic highlights the impact of demographic aging and labor accumulation.

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