The European Central Bank (ECB) is expected to cut interest rates from record highs at its upcoming meeting next week, but it remains unclear what steps ECB policymakers will take later this year, according to analysts at ING .
Buoyed by data showing inflation in the European zone is edging closer to the ECB's 2% target, policymakers have widely signaled they will cut the benchmark deposit rate by 25 basis points at the June meeting. The figure is now at an all-time high of 4% after a period of policy tightening aimed at controlling inflation.
Earlier this week, Chief Economist Philip Lane appeared to back a rate cut, telling the Financial Times in an interview that barring any economic shocks, the economic data provided enough evidence to justify cutting rates.
French central bank chief Francois Villeroy de Galhau also said the ECB had room to lower rates, but said it had "some freedom" over any possible further cuts.
The ECB will have a chance to examine the latest inflation data from the European zone on Friday, with economists predicting that prices rose at a slightly faster annual rate in May than in the previous month. Last week, ECB President Christine Lagarde stated that she was "very confident" that inflationary pressures were "under control."
ING analysts argued that while tapering in June looked like a "done deal," Lagarde's optimism "may be premature."
"In fact, the inflation data received since the beginning of the year was slightly stronger than expected, mainly due to the services sector, and at least in the next few months inflation may be slightly higher than projected by the ECB," informed ING analysts in a notes.
The analysts added that developments around wages - which are a key influence on broader price pressures - will be "important." Wage growth reached almost the highest level in the European zone in early 2024, although the ECB said this was partly due to rare factors alone.
A resurgence of inflation remains a risk, ING analysts said, noting that prices in the US which are usually the leading indicator for the European region "are in an upward trend again."
"Any signs of reflation as well as stronger economic activity will limit the ECB's room for maneuver," said ING analysts. "This is why we expect a hawkish reduction next week at least at the press conference, trying not to give any forward guidance."
