Société Générale anticipates European Central Bank policy: another 25 basis points cut in March, when will the "pause button" be pressed afterwards?

According to the Zhitong Finance APP, Société Générale recently released a research report on the European Central Bank's (ECB) policy outlook, predicting a further interest rate cut of 25 basis points at this week's policy meeting. It also noted that core inflation still poses sticky risks and is closely monitoring the results of wage negotiations in the German public sector. The bank believes that after the interest rate cut in April, a better assessment of the medium-term outlook and risks may be made in June, potentially shifting to a quarterly assessment of interest rates.

At this week's ECB meeting, another interest rate cut of 25 basis points is expected, and the statement regarding a restrictive policy stance is likely to be removed. If this statement is retained, it would imply that committee members foresee further rate cuts at the next meeting in April. While this aligns with Société Générale's predictions, the bank expressed doubts about whether current data is sufficiently clear to convey this signal, suggesting instead that more attention should be paid to upcoming data.

Meanwhile, discussions about the neutral interest rate have begun. Recently, ECB Executive Board member and economist Isabel Schnabel emphasized the upward pressure on the natural rate (r*) in a notable speech, advocating for caution in loosening policy and focusing on newly released data. She also pointed out that it can no longer be confidently stated that the ECB's policy is restrictive. However, given the significant uncertainty surrounding the neutral interest rate, many committee members may still prefer to lower rates further into a lower range, especially if this uncertainty harms the economic outlook.

Despite significant uncertainty in the U.S., Société Générale still believes that core inflation poses sticky risks, as the weakness in the U.S. labor market during winter did not reach previous expectations, and the bank is closely monitoring the results of wage negotiations in the German public sector.

The bank believes that after another rate cut in April, the ECB will be better positioned to assess the medium-term economic outlook and risks in June, and may shift to a quarterly assessment of interest rates. New employee forecasts may indicate that inflation rates will be slightly higher this year, while GDP growth in Europe will be slightly lower.

Société Générale's predictions for ECB policy are as follows: Q1 2025, quantitative tightening scale approaching EUR 50 billion per month; March 2025: policy rate cut by 25 basis points; April 2025: policy rate cut by 25 basis points, down to 2.25%; second half of 2026: launch of structural long-term lending operations.

Current data slightly better than expected, but uncertainty remains high

Despite concerns that the European economy would experience substantial slowdown amid U.S. tariffs and high uncertainty, Société Générale believes that the confidence shock from U.S. trade policies may have eased, given the relatively robust fundamentals in the Eurozone. The recovery in global trade has also curbed the downward trend in manufacturing, offsetting adverse factors that negatively impact confidence.

Therefore, the bank stated in its report that it has not observed substantial weakness in the labor market, which may be necessary to bring wage growth rates down from above 4% to levels more conducive to price stability. If productivity remains low, this level may be far below 3% A key wage agreement worth noting is the wage agreement for the German public sector, with relevant negotiations currently underway, demanding an 8% wage increase within a year, and the next round of negotiations starting on March 14. While the downside risks to economic growth and the risks of inflation being below target may still dominate the thoughts of many policymakers, more data on the potential risks of core inflation may still be needed at this time.

New employee forecasts indicate economic growth slowdown, but inflation presents two-way risks

The bank expects that the European Central Bank's forecasts will not change significantly until uncertainty decreases or there are greater changes in the labor market outlook. Due to energy prices being higher than expected, the overall inflation rate for this year may be slightly revised upward, while GDP growth for this year and next may slow down.

The bank still expects that overall inflation in Europe will be below the European Central Bank's current expectations next year, but this is mainly based on the assumption of a stronger exchange rate. The bank's forecast for core inflation in 2026 is higher than that of the European Central Bank, as it is not very optimistic that the European labor market and profit conditions will allow core inflation to fall to around 2%, despite similar predictions for unit labor costs.

As the distribution of risks has significantly widened, the bank believes that substantial changes in forecasts that would have a greater impact on the outlook for policy interest rates will not occur until at least June. While the economic situation has well withstood the recent round of uncertainties, by June, if tariffs, the situation in Ukraine, and related circumstances in Germany and France become clearer, it may lead to more drastic changes in forecasts. If European domestic demand and the labor market show resilience as the bank expects, the European Central Bank may pause interest rate cuts, although there is still some room for cuts within the neutral interest rate range.

In addition, discussions on the neutral interest rate have begun. The bank believes that the European Central Bank's still large balance sheet is one reason for its cautious approach to interest rate cuts. Isabel Schnabel believes that the real equilibrium interest rate (r) faces upward pressure, and policy easing should be cautious. Over the past decade, regulators have increased liquidity requirements, central banks have implemented quantitative easing, and governments have conducted fiscal consolidation, leading investors to be willing to pay a premium for holding these safe assets, thereby lowering the real equilibrium interest rate.

Now, this process is reversing, with government net borrowing remaining large, balance sheets normalizing (quantitative tightening), geopolitical divisions weakening demand for safe assets, and global excess savings turning into global bond excess. Therefore, the upward pressure facing the natural interest rate (r*) may persist for some time. This will provide lessons for future quantitative easing policies, which should be more temporary and targeted, or influence the European Central Bank's strategic assessment this year