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ECB reaction: Uncertain in January, rendez-vous in March

  • 26 January 2024 (3 min read)

Key points:

  • The ECB Governing Council (GC) stayed put on the rates front at its January meeting as widely expected.
  • “High for long” interest rate policy guidance was unchanged, but came with a surprisingly (strong) dovish skew. GC seemingly more uncertain and divided than we thought.
  • Disinflation process is well underway. All about it remains on track, to be confirmed with updated March staff forecasts
  • As such, a rate cut in April cannot be ruled out if inflation data fail to surprise to the upside. We continue to foresee the ECB keeping a cautious approach and thus the cutting cycle to start in June. 

The ECB GC decided to leave its policy rates unchanged, with the deposit facility remaining at 4% as widely expected. It is only the third time in a row, the ECB left interest rates unchanged since its hiking cycle started in July 2022, reflecting the ECB’s emphasis on the duration of its monetary tightening since the meeting in September. There was a consensus within the GC that it was premature to discuss about rate cuts, highlighting (again) its data (rather than date)-dependence.

Nothing changes, yet everything changes. The monetary policy statement critically mentioned that “incoming information has broadly confirmed its previous assessment of the medium-term inflation outlook”, implying that December forecasts remain very much valid. We agree on the inflation front. We remain more cautious on the growth front, less inspired by the January PMIs than Mrs Lagarde sounded. In turn, we were surprised that data broadly coming in line with forecasts generated such a turnaround in GC’s assessment. The only hawkish bit in the meeting was that domestic inflation has yet to correct down. In sum, the tone shifted from: “we should absolutely not lower our guard” in December to “we need to be further along in the disinflation process so that we are confident enough the inflation target is reached in a timely manner, and sustainably so” – a much softer tone, rather emphasizing risk management mode. Such wording makes de facto a cut “by the summer” – making April GC meeting very much live - more likely than “if not in the summer” that she mentioned in her interview with Bloomberg on 17th January.


Rendez-vous in March. Having a rate cut in April means a very real possibility that March staff forecasts will be crucial as the few weeks between 7 March and 11 April will provide little additional information. This means that until the April meeting, the three inflation prints will need to be faultless on both the core and energy front. As mentioned above, we are not convinced that latest activity data are showing a meaningful turnaround in GDP growth as the ECB expects. This means that another growth projection downgrade could also support ECB messaging in March to point towards an imminent cut. 

Our baseline is unchanged with rate cuts to start in June, coming 25 basis points (bps) a quarter. Negotiated wages have yet to decisively turn, while labour productivity is persistently weak. Euro area December Indeed wage tracker showed some stabilization only a tad below 4% y/y though. January PMIs confirmed ongoing service price pressures, pushing overall output prices at the steepest rate since last May. That being said, if message from today’s monetary policy is followed through in upcoming communication – we will be attentive to what the hawks will say after this meeting – we believe that a rate cut in April cannot be ruled out.  

Market reaction followed the consistent dovishness across the policy decision and press conference. April rate cut is now almost fully priced in (vs -17bps prior to the meeting). In turn, 10y bund rallied 8 bps to 2.28. Logically, EURUSD also dropped to 1.0830 from 1.09 and EUR equities rallied. The exchange rate and equities move have also to be put in context of the upside surprise in US Q4 GDP.

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