Thoughts

March 08, 2024 | 13:37

ECB Gives Clarity and Colour for the Coming Cut

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)

Well, three out of the four characteristics fit. No, not diamonds, but the ECB’s guidance. We typically don’t hear such clarity often from the ECB. Yes, we know that it will make decisions based on the data (as it is data-dependent) and not on the calendar. But the fact is that President Lagarde, in the first 15 minutes of the press conference, dropped a big hint that June is the likely month for the first rate cut since 2016. She prefaced it with a bit of colour, by saying that more evidence of slower inflation is needed, or more data. “We’ll know a little bit more in April” (and she provided a visual… using her thumb and index finger to demonstrate “little”) “and we’ll know a lot more in June”.

Well! That was almost like wording given by the Norges Bank, or Brazil’s central bank. In fact, she used that reference to June three times during the 55-minute-long press conference, in case anyone missed it the first time.

With the exception of that hint—and a strong one at that—the decision and the press conference didn’t shed any other new light. It was interesting that rate cuts were not discussed; but, the “dialling back” of its restrictive stance was. As our Stephen Gallo, Global FX Strategist put it, the comments were still guarded but were dovish, on net. “Importantly, the ECB does not have the bloc falling significantly below the 2% target for any of the FY projections (yet). This year’s headline HICP has been revised lower, but the following years are basically unchanged. From their perspective, easier financial conditions—over the course of the year—and eventual full-scale easing, will be supportive.”

A parade of Governing Council members emerged afterwards, and it was notable that some of the normally hawkish types supported President Lagarde’s views. Germany’s Joachim Nagel admitted that “the probability is increasing that we could see an interest rate cut before the summer break”, Finland’s Olli Rehn said that “the risks of premature… rate cuts… have substantially decreased…”, and Lithuania’s Gediminas Simkus said “June is the possible month for a rate cut.” Even Austria’s Robert Holzmann seemed to shift a tiny bit… “One of the decision yesterday was no change but a change may be in preparation.” According to Reuters’ sources, an “overwhelming majority” support a June cut and some are proposing a July one, too, to appease those who favour an earlier rate reduction (April).

So what next? Watch all the data. Before the June 6 announcement, there will be three more CPI reports to dissect (for March, April and May), labour costs, the ECB’s survey of CPI inflation expectations, and its negotiated wage tracker. The latter will have the Q1 results (Q4 improved… it would be ideal if Q1 did, too). If activity continues to cool, along with price pressures, look for key rates to be reduced by 25 bps at the June meeting.

Note that the BoE’s meeting on March 21 will also be under the microscope. We expect the Bank to cut in May, but keep an eye on the February jobs report (particularly, the wage measure) and January GDP, due March 12 and 13.