Thoughts

April 05, 2024 | 14:14

ECB Preview: Let's Wait Awhile

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

With apologies to Miss Jackson…

Spoiler alert: The ECB will leave well enough alone on April 11^th. Sure the headline inflation rate tumbled to 2.4% as of March, matching last November’s 28-month lows and making October 2022’s rate of 11.6% a distant memory.

Clearly that is not 2%, but the central bank has already said it won’t wait until it lands right on target. And core CPI fell to a 2-year low of 2.9%, down from last March’s peak of 5.7%. Plus, CPI expectations (both one and three years out) are under control. But that is not enough. That was made crystal clear at the March 7^th meeting. Yes, there has been “good progress” made on the disinflationary process, but they are “not there yet” and they “need more evidence”. It doesn’t help matters when services CPI has been stuck at 4% for five consecutive months. Hence, President Lagarde all but hit everyone over the head with her forward guidance: The ECB “will know a little more in April but we will know a lot more in June”. And, the March Minutes stated that whatever information the Governing Council would have by the April meeting was “much more limited”.

And, since that meeting, every member of the Governing Council has thrown their support behind what the President said. (Actually, one uber-dove was open to April, but he was an anomaly.) This includes the big hawks: the Netherlands’ Knot (“I have personally penciled in June for a first rate cut”); Germany’s Nagel (there’s an “increased probability of a rate cut before the summer break”); and, even Austria’s Holzmann (if there are lower wage agreements made, then “rates could fall earlier”).

But there needs to be real confidence that inflation is not going to go the other way. Recall the ECB is the only major central bank that brought up the reputational risks from messing up, of moving too fast or too soon. This was straight from the Minutes of their January meeting… there were “high reputational costs” if the economy picked up, wage growth accelerated, and there was renewed inflationary pressure. Given the broadly weaker economic outlook for some of the larger economies, we expect the ECB will provide more confidence of a June 6^th rate cut at the next meeting.