What to Watch for: Indications of Change at the ECB Meeting
The European Central Bank’s monetary policy meeting is just around the corner, and all eyes are on Christine Lagarde, the bank’s president. While it is expected that Lagarde will not reveal much about the bank’s intentions, investors and markets will be searching for subtle signs of change. The anticipation is mounting as more investors are pricing in cuts for June.
One thing that is almost certain is that the ECB will keep interest rates unchanged at 4%. The bank has held them at record highs since October, following ten consecutive hikes in 2023. The reason behind this decision is the bank’s commitment to lowering eurozone inflation.
Despite keeping interest rates steady, investors are increasingly pricing in the possibility of rate cuts in June. The ECB has pushed back against talks of lowering rates, stating that cuts will only be made when data clearly shows inflation falling to target levels of 2% across the eurozone. However, recent data has caused investors to adjust their expectations. New figures from Eurostat, the European Union’s official data provider, revealed higher-than-expected inflation of 2.6% in February, down from 2.8% in January but still higher than anticipated. This unexpected inflation has led investors to believe that the earliest opportunity for rate cuts will be at the ECB’s June meeting, as there is no meeting scheduled for May.
A Reuters poll of economists shows that two-thirds of forecasters predict a 25 basis point cut in June, which would lower interest rates to 3.75%. However, this is a decrease from the 150 basis points of cuts expected at the beginning of the year. Market expectations have shifted to anticipate 90 basis points of cuts in 2024.
Although the ECB is unlikely to make any clear commitments regarding rate cuts, investors will be closely analyzing Lagarde’s communications during the press conference that follows the meeting. Analysts at RBC Capital Markets expect the ECB to retain flexibility, emphasizing the bank’s data dependence and its focus on incoming information on wage growth. On the other hand, analysts at ING suggest that the ECB might provide subtle signs in its communications, indicating an openness to rate cuts in June. They note a gradual change in the bank’s communication, shifting from denying rate cuts to acknowledging that it was too early to discuss them in January.
Additionally, new staff forecasts from the ECB could further support the possibility of rate cuts. If these forecasts show any signs of inflation falling back down to 2% before the third quarter of 2024, it would open the door to earlier rate cuts. Analysts expect downgrades to the bank’s headline and near-term growth figures in these staff forecasts.
As the ECB meeting approaches, investors are eagerly waiting for any indications of change. Lagarde’s communications, along with the staff forecasts, will play a crucial role in shaping market expectations. Whether it’s subtle signs or clear commitments, any indication of rate cuts will have a significant impact on the eurozone’s economic outlook.
