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Qatar National Bank (QNB) expects that in the absence of any significant progress in inflation rates, the ECB will embark on a gradual monetary easing cycle in the next phase, with interest rates to be further cut by 25 basis points in 2024.
In its weekly report, the bank mentioned the ECB’s decision in early June to change monetary policy and cut interest rates by 25 basis points, as it was expected and came two years after the start of a record tightening cycle that included a 10 basis point cut in the eurozone deposit rate, which accordingly rose to 4%.
The report noted that the move was of historic significance and was considered the first time in history that the ECB had started a monetary policy easing cycle ahead of the Federal Reserve, whose policies were usually more effective.
“During the same period, energy and food prices, the most volatile factors, rose by 2.9%.
The report noted that despite persistent concerns about inflation, this decision represents the beginning of a gradual rate cut cycle based on three main factors: First, inflation reinforces the ECB’s stable convergence to its target interest rate, supporting further rate cuts, with inflation currently half a percentage point above the monetary policy target.
Core inflation, one of the key measures of policy that provides a more stable and informative view of the underlying trend, peaked at 7.6% in March 2023 and has since started a sustained decline to 2.9%. Despite volatility and surprises, the inflation slowdown cycle is expected to continue.
Long-term expectations have also remained stable at the target level of 2% for two consecutive quarters. As inflation approaches the target level, controlling expectations is crucial to easing the additional price pressure brought about by businesses and workers’ demands for wage increases. The ECB’s interest rate cut cycle includes relevant expectations, and existing data supports the launch of the interest rate cut cycle.
Second, the report argues that the record-long interest rate tightening cycle, coupled with the process of normalizing the central bank’s balance sheet, has led to unusually constrained financial conditions, suggesting that the euro area financial conditions index provides a summary of credit costs, combining short-term interest rate information and long-term credit spreads.
Likewise, he said the index jumped in mid-2022 and is currently in the worst period of the global financial crisis (European economy faces credit crisis, asset prices plummet) or the European sovereign debt crisis.
In addition to rate hikes, the ECB continues to reverse the balance sheet expansion implemented during the pandemic to support economic activity, while the ongoing quantitative tightening process will continue to withdraw liquidity generated by unconventional and temporary measures. The decline in the financial system and high credit costs will affect the size of its actual contraction and may decline further in the coming months, confirming the ECB’s progress in tightening monetary policy. The policy has paid off.
Thirdly, the report states that the eurozone is expected to continue its sluggish economic growth performance after a small recession in the second half of 2023, as the latest level of the Purchasing Managers’ Index points to stagnation in economic expectations, explaining that by 2024, the Purchasing Managers’ Index remains… below or close to the 50-point threshold that distinguishes contraction from expansion, tracking the combined development of the services and manufacturing sectors.
The bank noted that Bloomberg forecasts talked about a modest 0.6% growth in real GDP this year, but its weekly report hinted at room for positive surprises in eurozone activity, showing growth of 0.9%, which was still well above expectations and below the long-term growth rate of 1.5%.
The Qatar National Bank (QNB) report concluded that economic growth will remain well below current trend, which will require some support through accommodative monetary policy.
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