by Francesco Canepa and Balazs Koranyi

FRANKFURT (Reuters) – The European Central Bank (ECB) will face a difficult balancing act on Thursday, as it is expected to cut its growth and inflation forecasts while trying to dampen speculation about imminent rate cuts of interest.

The ECB is certain to leave borrowing costs at record levels, with the only possible policy change linked to the end of its latest bond-buying program, a legacy of the COVID-19 pandemic.

The central bank’s final meeting of the year will be far from boring, however, with its president Christine Lagarde under pressure to defend or abandon her forecast that rates will remain at the same level over the next two quarters.

Investors now expect a first rate cut in the spring, which could make the ECB the first major central bank to backtrack from a global effort to reduce inflation.

Christine Lagarde should, however, go against speculation betting on a reduction in rates, while it took a year and a half and ten consecutive rate increases for the ECB to place inflation on a convincing downward trajectory.

“We expect the ECB to recognize that inflation has fallen faster than expected, but to be wary of declaring victory prematurely,” Deutsche Bank economists said.

Christine Lagarde will hardly be able to rely on the updated economic projections of the ECB, which should revise downwards forecasts for inflation and gross domestic product (GDP) in particular for next year.

Economists polled by Reuters estimate that prices in the euro zone will rise by 2.5% in 2024, 2.1% in 2025 and 2% in 2026, moving closer to the central bank’s target after a hike exceptional 5.5% this year.

The problem for Christine Lagarde and her colleagues on the Governing Council is that the ECB’s projections have often been too far from reality, particularly in 2021, when the central bank failed to anticipate rising inflation.

ECB Governing Council member Isabel Schnabel set the tone last week when she ruled out further interest rate hikes due to a “remarkable” fall in inflation.

Christine Lagarde is expected to echo the argument that monetary policy makers should not frame that rates will remain stable after mid-2024, but should instead focus on economic data.

“We expect a clear change in tone, with reliance on data for any future decisions even greater than in the past,” said Dirk Schumacher, an economist at Natixis.

Market participants are betting on a possible reduction in borrowing costs as early as March and a slim majority of economists polled by Reuters believe it will occur by June.

(Reporting Francesco Canepa; Camille Raynaud)

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