ECB Preview: Rate cut pondering, decision likely in June
- 01 March 2024 (3 min read)
A decision free meeting
Depo rate is to remain at 4% as market has almost entirely priced out a March rate cut, following recent flurry of ECB speakers. Only Portuguese Governor Centeno has been open to cutting interest rate at this meeting. Otherwise, discussions on revised operational framework are reportedly advancing well, edging towards keeping a floor based system. Reuters (29 February) suggested a presentation may come as soon as 13 March, significantly earlier than “late Spring” as indicated by President Lagarde in January. In any case, these should have little to no ramification for the monetary policy stance in the short-term.
Cautiously inching towards rate cuts
In the past few weeks, ECB speakers have expressed their (diverging) views on the timing of a first rate cut. Banque de France Governor laid out a more comprehensive approach which may help to strike a compromise: the timing of the first cut, the pace of the subsequent cuts, and the final level of the policy rate. During the Q&A, President Lagarde will likely report a first discussion on the matter. In doing so, she is likely to come back to ECB’s three pillar approach: (revised, for more see below) inflation outlook, underlying prices, and transmission of monetary policy, likely concluding time was not right not to decide nor to commit at such an early stage. Underlying inflation to remain key contentious item - especially when (strong) nominal wage growth is “netted” with very weak labour productivity.
A (long) list of items worth the wait
First and foremost Q1 wage (and national accounts data), amidst still ongoing good resilience of employment. Second, uncertain (higher) March HICP outturn amidst this year’s early timing of Easter. Third, more clarity on Fed’s stance which next meets on 20 March. Finally, although likely to be revised down (again), the growth outlook may not be bad enough to hasten a decision to cut rates. In light of the above, and amidst significant rate cut repricing by the market in line with our forecasts, we think President Lagarde is likely to strike a broadly neutral, data-dependent tone.
We stick to our long-held June rate call
The following meeting being just four weeks away (11 April), we think it would take quite a suite of events (Fed dovish turn, sharp downside surprise in March flash inflation print, adverse shock to affect growth outlook) to force the ECB starting its cutting cycle without updated forecasts. In turn, while an April rate cut cannot be entirely ruled out, we maintain our long-held call of a 25bp rate cut in June – 3 in total this year.
ECB staff to revise down GDP growth
We think ECB staff is likely to revise euro area growth down owing to both weaker than expected Q4 GDP (0.0% q/q, ECB expected 0.1% q/q), and still subdued business surveys for Q1. All in all, 2024 growth is likely to be revised down by 0.2-0.3pp from 0.8% y/y projected in December, closer to our unchanged forecast of 0.3%. Narrative for 2025-2026 is unlikely to be significantly altered, both projected at 1.5% - possibly slightly lower in 2025. Crucial in our opinion will be to monitor underlying labour productivity assumption, feeding through unit labour costs, while forward looking indicators suggest ongoing strong wage growth.
Price wise, adjustment should be limited, also skewed to the downside
We think 2024 headline inflation projection is likely to be revised down by 0.2pp/0.3pp from 2.7%. This is due to slight downside in past inflation data as well as much lower gas and electricity futures (versus December). While core may also revised lower in the short-term, we think impact from lower GDP growth but higher unit labour costs are likely to broadly offset each other maintaining core inflation above 2% in the medium-run. In turn, we do not think updated forecasts will show headline inflation hitting the 2% target significantly earlier than H2 25 as it did in last December round.
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