Thoughts

May 31, 2024 | 16:24

Lagarde to the Governing Council: It's Go Time

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

After what seems like weeks and weeks of what eventually became every single Governing Council member (including the ultimate hawk from Austria) telling us that, unless something completely unexpected barrels out of the clear blue sky, hurtling toward Earth, on June 6, the ECB will cut its key interest rates for the first time since the days of Mario Draghi in 2016.

Look for the refi rate to fall 25 bps to 4.25%, the marginal lending facility to 4.50%, and the deposit rate to 3.75%. It is a done deal, even with Euro Area CPI coming in a bit hotter than expected at 2.6% in May, and core CPI accelerating to a 2.9% rate. We know things don’t move in a straight line and that the “last mile may still be rather bumpy”. Besides, the central bank’s own survey of 3-year CPI expectations slowed to a 6-month low of 2.4% in April. To use the words of some of the voters, “the time is thus ripe”, “it is a done deal”, and the cuts are “about to begin”. Look for the ECB Staff Projections to show a further improvement in the near-term outlook for CPI and core CPI, which would support the widely expected move.

What the market will instead focus on is the communication around the next cut. July does not have even close to the same amount of support as for June. Though some have warned that a July move cannot be dismissed, the broader message is one of data-dependency (and “not Fed-dependency”); the ECB is not on auto-pilot and is not pre-committing to anything; and, the 25 bp cut will still leave policy in restrictive territory. Besides, the surprising increase in Euro Area negotiated wages in Q1, which comes before the jobless rate slipped again to a record low of 6.4% in April, will ring alarm bells for the hawks. Will these higher costs be taken in by companies or will they be passed along to the consumer? And, a weaker EUR also has inflationary consequences, so the ECB needs to be careful not to give the slightest hint that it is fully prepared for another cut soon after.

We fully expect some of the above phrases—being dependent on data, not the calendar or the Federal Reserve—to be reused and repackaged with plenty of noncommittal remarks. Meantime, we continue to expect one more 25 bp rate cut in September.