EconoFACTS

April 11, 2024 | 10:21

ECB Hold 'Em

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

The saying "No man is an island" came to mind during the ECB press conference (which seemed to go by pretty fast).

So what happened?

The ECB, as fully expected, left monetary policy alone today. Here is the obligatory list of the key lending rates.... the refi rate remains at a 22½-year high of 4.50%, the marginal lending facility at a 15½-year high of 4.75%, and the deposit rate at a record high of 4.00%. And the Press Release hinted that the central bank will ease in June. It rhymed off how inflation was faring so far.... it continues to fall, ditto for underlying measures, wage growth is gradually moderating, firms are not passing on higher costs (they're absorbing most of the rise in labour costs), financing conditions are still restrictive, and past rate hikes are weighing on demand. However, services CPI is still high.

Now, here is the key line that made one say "Hmmmm"...

"If the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction."

The underlined parts are my emphasis.... in other words, if the updated Staff projections in June still point to easing inflation, that will increase the Governing Council's confidence that, 'yes, it is happening! it really is!' (my words; they have a far better vocab than yours truly), and cut rates in June. As of right now, we know that March CPI is at a near 2½-year low, and core CPI is at a 2-year low. If April and May turn sharply higher, and futures prices for Brent rise further, then it will be less certain.

Anything else?

The Press Conference had a few interesting tidbits, although President Lagarde gamely stuck to the script.

A "few" members felt sufficiently confident on the data received so far but agreed to rally behind the "very large majority" that needed more confidence. ... So the doves spoke up!
When asked about the impact of the U.S. March CPI, the President was ready. "I have said that we are data dependent, not Fed dependent and obviously anything that happens matters to us and will in due course will be embedded in the June projections. All of that finds its way into our projections." .... Interesting! She did not shrug it off.
On the weaker EUR due to changing views on the timing of Fed rate cuts, President Lagarde said she would "not speculate" on what other banks do but the "consequences on price stability" will be taken into account and will "find its way into our projections"..... Interesting! She did not shrug it off.
Note to self..... don't get too excited if inflation goes a little above expectations in any given month. (It's hard, though!) The ECB head acknowledged that there will be "bumps on the road" and not to expect a "linear decline in inflation". And those "bumps" are incorporated in the projections.

Bottom Line: Unless something goes very wrong, a June rate cut looks to be a go. What happens after that has become far less certain, though, given recent developments.... Fed expectations and energy prices.