EconoFACTS

December 14, 2023 | 10:16

Grinch or Santa? No Presents from the ECB This Year

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)

Duty calls....... despite being in COVID-recovery mode, President Christine Lagarde made it through the hour-long press conference without "coughing my life out" and responded to all of the questions regarding potential rate cuts, comparisons to the prior day's dovish Fed announcement, and the early end to PEPP reinvestments and what it means.

Bottom Line.... the ECB's message is still slightly hawkish in nature, as was the BoE's earlier today. Market expectations for earlier cuts in 2024 are premature. The hawks still have a big say.

Here are the key takeaway to the December ECB decision.

Key rates were left alone for the second time in a row; that is: refi rate remains 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 4%. Totally expected.
No shock to see the headline inflation rate forecast for 2024 was slashed to 2.7% from 3.2% in September. (See the table below.) That was the most notable change. Note also that core CPI for 2024 was trimmed to 2.7% from 2.9%. That was the component that was pushed higher back in June (to 3.0% from 2.5% in March) after some policymakers questioned the Staff forecasts. Interesting how things turn out. Growth forecasts were lowered though, for this year and next.
The ECB is keying in on persistent domestic inflation, which is elevated due to high wage growth. There are still upside risks to inflation but President Lagarde made a few mentions to wages (noting that in the new year, many workers in their surveys will be going through new collective bargaining agreements) and to profits. She pointed out that if businesses absorbed higher wages and reduced markups, it would be "really good news for inflation purposes". Methinks that might be a big if.
The key line about how rates need to be “maintained for a sufficiently long duration” in order to “make a substantial contribution to a timely return of inflation to target” is still being used. In other words, higher for while? The ECB is "data dependent, not time dependent."
The decision to shorten the PEPP's time was a bit of a surprise. This is where the hawks had some influence. The full reinvestment of the principal payments from maturing securities will continue until June; but, starting in July until December, it will be cut in half, or by €7.5 bln/month, on average. All reinvestments will stop as of January 2025. This normalization of the ECB's balance sheet will begin in July. As President Lagarde said, "the PEPP has served its purpose and the pandemic is over." And no, the ECB does not consider it to be a prerequisite to rate cuts, according to the central bank head.
A reporter pointed out that Fed Chair Powell said that rate cuts are now part of the discussion. So was there any discussion during the ECB meeting? The way President Lagarde put it.... well, yours truly nodded vigorously in agreement. "There is a whole plateau of hold between hike and cut!" And by the way, they did not discuss or debate the issue of cuts. Supposedly. The data-dependent, meeting-by-meeting, "look at the totality of the data" (word borrowed from Powell?) process, still holds.
"We are not lowering our guard."
"There is still work to be done. That could be in fhe form of holding."