ECB laying groundwork for rate cuts
The ECB kept its communication on monetary policy unchanged in its statement, however its staff made downward revisions to its inflation forecasts, which lay the groundwork for a start to a monetary easing cycle in the coming months. In the press conference, President Lagarde suggested that June would most likely be the starting point for rate cuts.
Inflation seen at target next year
Inflation is now seen at 2.3% in 2024 (previously: 2.7%), 2.0% in 2025 (2.1%) and 1.9% in 2026 (1.9%). A lower contribution for energy prices was a key factor behind the revision for 2024, however core inflation has also been revised down. Inflation excluding energy and food is seen at 2.6% for 2024 (2.7%), 2.1% for 2025 (2.3%) and 2.0% for 2026 (2.1%). This partly reflects a weaker economic outlook for this year. GDP growth is now seen at 0.6% (0.8%), though they continue to see a pickup next year to 1.5%. The ECB’s new forecasts for growth and (core) inflation now are closer to our own forecasts, although we still are slightly less positive on GDP growth this year (0.4%) and we expect core inflation to be slightly lower this year (2.4%) as well. Our forecast for headline inflation in 2024 (2.3%) and 2025 (2.1%) are roughly the same as those of the central bank.
Not sufficiently confident yet
Despite the downward revisions, in the press conference, ECB President Christine Lagarde said that recent data made the Governing Council more confident on inflation but not yet ‘sufficiently confident’. Although the ECB was seeing evidence of slowing underlying inflation, it wanted to see more convincing data of slowing domestic inflationary pressures, especially on wage growth and services inflation. In terms of the data flow on these topics, she asserted that ‘we will know a little more in April and a lot more in June’. This is not a very subtle hint that the ECB will likely wait until June before cutting rates.
More rate cuts in H2 than priced
Our base scenario is that the ECB will cut rates by 25bp in June, which is broadly in line with current market pricing. We think that after that, 25bp rate reductions will follow at each of the remaining policy meetings of this year, meaning a cumulative 125bp in rate cuts in 2024. We would still see this as a gradual normalisation given that the policy rates would still be at restrictive levels at the end of this year. However, financial markets are pricing in a slower pace of rate cuts after June, with cumulative rate reductions of around 95bp for this year (even considering high rate cut expectations after the statement). We therefore think that once the ECB starts to cut rates and it becomes clearer that it will move again at the next meeting, there is substantial room for more rate cuts to be priced in.