EconoFACTS

January 25, 2024 | 10:30

ECB Holds in the Winter.... But Will Cut in Spring or Summer?

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

I'll cut to the chase ... the April to June period is live for the ECB. Although I've dismissed the possibility of an April 11th cut, due to the fact that 1) there won't be any new staff forecasts to refer to and 2) it takes time for these new wage settlements to filter through the economy, President Lagarde did not simply shrug off an earlier rate cut.

So that's the bottom line. If you don't have time to read the rest, at least you know that.

The ECB stayed on hold today, which was widely expected. Key rates were left untouched: the refi rate at a 22½-year high of 4.50%, the marginal lending facility at a 15-year high of 4.75%, and the deposit rate at a record high of 4.00%. Ditto for the line about how these rates, if maintained for a "sufficiently long duration, will make a substantial contribution" to the goal of 2% inflation. And the plan to accelerate QT in the second half of the year still holds.

Here are some interesting tidbits/takeaways:

the Press Statement axed the line about how "domestic price pressures remain elevated"
President Lagarde said she "stood by" what she said in Davos, when she alluded to a summer cut. By the way, I don't think she actually said June. She was asked about a possible summer cut and she said "I would say it's likely, too." But that's neither here nor there.
The ECB has access to more real-time wage data—a wage tracker—and there are signs of stabilization there. Growth was "directionally good" and the hope is that higher wage are absorbed by businesses and are not passed down to consumers. And so far, that is what is happening.
March sounds like it is out ... they will have new inflation data by then (January and February CPI) but other wage data will arrive "later". And they look at a "whole range of data" for wages.
She confirmed that the wage settlements will be received by the end of April.

June is still more likely, especially if the hawks resist and demand more time to assess the impact of the wage negotiations. But April cannot be ruled out. And yes, that would mean the ECB could move before its U.S. counterpart (especially after that blowout 3.3% real GDP jump).