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Mid-year interest rate cut expected 'despite blow to spring hopes' — Possible About Elements Neil Discussions Are Shearing Property Banks' Such On Capital Cuts Loans Economics Interest As Some Souring Mercial Books Rate Of Suggests Plicating

Mon, 12 Feb, 2024 - 19:38

Eamon Quinn

Financial markets have not given up completely on their bets that the European Central Bank will vote for an early cut in interest rates before the summer, but a mid-year rate cut is still on the cards, an economics consultancy has predicted.

Capital Economics group chief economist Neil Shearing said in a commentary that discussions on the timing of interest rate cuts on both sides of the Atlantic have been complicated by “the noise” surrounding the effects of inflation staying elevated for longer, souring commercial property loans on the books of some banks, and the wider performance of economies.

However, the chief economist predicts the start of interest rate cuts by the ECB, US Federal Reserve, and Bank of England are on their way by the middle of the year.

“As ever, the challenge is to separate the signal from the noise,” Mr Shearing said.

"Our view remains that the US economy is on course for a soft landing, with inflation falling further over the coming months and growth starting to cool.

The growth outlook for the eurozone and UK is weaker, but we do expect inflation to fall further in those economies over the first half of this year.

“Hopes for rate cuts this spring have been dealt a blow, but the Fed, ECB and Bank of England are all likely to start easing policy by the middle of this year. And as rates come down, that should make it easier to manage the financial fallout from problems in pockets of the commercial real estate market,” he said.

“Recent headlines may suggest a more challenging environment for monetary policy deliberations, but central bankers [and investors] need to maintain a sense of perspective,” the economist said.

Investors and executives have been on edge after smaller banks from New York to Tokyo were hit by rising defaults in commercial property loans, which have been in sharp decline as last year’s spike in interest rates compounded challenges from the shift to working from home.

The concerns over the falling prices in office market spread to Europe last week when the bonds of specialist lender Deutsche Pfandbriefbank slumped because of its exposure to the US market.

German Finance Minister Christian Lindner said on Monday the market for commercial real estate is undergoing an adjustment period, with rising interest rates putting stress on the asset class across the globe. In an interview, Mr Lindner said:

Interest rates are much higher than expected and so many companies are worried and have to correct their expectations.

“We have to be aware of the situation.”

French and German banks have the most commercial real estate loans in the EU, according to data from the European Banking Authority for the third quarter.

Earlier analysis from the European Systemic Risk Board, a fellow watchdog, showed banks in Germany have the highest share of cross-border commercial real estate exposure among banks from the EU’s major economies.

“The German banks which are involved in this business are under the supervision of the ECB,” Mr Lindner said.

“And so I’m not involved in this, but from all what I have known the market as a whole is stable, unless there is a need for new priorities and to rearrange projects due to the higher interest rates.”