Thoughts

January 19, 2024 | 12:57

ECB Preview.... Patience

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)

Let’s dispense with the formalities. No changes to policy are expected at the January 25 ECB meeting. The last gathering was just a little over a month ago, and there were a couple of quiet weeks nestled in there given the holidays and all. So if not January, then when? There had been some rumblings about the March 7 meeting being “live” but they were silenced pretty quickly, given the emphasis on the first quarter wage negotiations, and their eventual impact on business pricing and consumer spending. April 11 is unlikely as there won’t be any updated staff forecasts to lean on.

That brings us to June 11 (also our call). Recently, the ECB’s Chief Economist Philip Lane mentioned that month, specifically, which is notable. He was discussing the “important” wage data, and that they will be available “by our June meeting.” And, President Lagarde, when asked about the possibility of a summer rate cut, admitted that “I would say it’s likely too.” One wonders if she meant to blurt that out. In any event, it might be a hard sell, given the commentary from the more vocal Governing Council members this week. The common theme among the majority of these more hawkish types was patience, using phrases such as “too soon” to discuss rate cuts, or warning not to “jump the gun” on cuts, and that “markets are getting ahead of themselves”. The most extreme view was from Austria’s Holzmann, who warned that markets “shouldn’t count on rate cuts at all in 2024.”

The Minutes from the December meeting were telling, as they began with a discussion about how the narrative since the prior meeting had “entirely turned around”, driven by more bullish views on “immaculate” disinflation and expectations for an early and sharp monetary policy reversal. And, though fears of a hard landing in the Euro Area were “alleviated” given the decline in inflation and the broader view that tighter policy was working, there were still a lot of concerns. They revolved around the question of how much more of the rate hikes remained in the system, and that there was a “significant part of the interest rate pass-through” still at large. Geopolitical risk and its negative impact on household and business confidence was also mentioned, and the possibility that looser financial conditions could “derail the disinflationary process”. All are legitimate concerns. What we do know, however, is that since the December meeting, consumer inflation expectations have fallen, and are now at a near two-year low. Given that such expectations were also mentioned as a concern for the ECB, this new news will likely prompt a rethink.

Also, the ECB will start the process of normalizing its balance sheet on July 1, which coincides nicely with the first cut. How many more cuts to follow will depend on the data but 75 bps for the year should be a minimum.