ECB Rates Decision: What to Expect on Thursday

When
Will
the
ECB
Start
Cutting
Rates?

A
lot
has
happened
since
the

Governing
Council’s
decided
in
December
to
keep
rates
unchanged
at
4.5%,
with
President
Christine
Lagarde
telling
reporters
the
council
“did
not
discuss
rate
cuts
at
all”.

For
one,
underlying
inflation
is
falling.
While

headline
inflation
in
the
eurozone
was
up
in
December,
core
inflation,
which
shows
price
changes
without
the
cost
of
energy
and
food,
fell
20
basis
points
to
3.4%.
Price
momentum
is
likely
to
slow
further
from
February,
the
Blackrock
Investment
Institute
expects.
Inflation
may
even
fall
well
below
the
2%
target
temporarily
in
the
coming
months
as
the
effects
of
the
energy
shock
subside.

The
ECB’s
sole
mandate
is
to
rein
in
inflation
to
its
target
rate
of
2%,
but
the
crux
is
to
achieve
this
without
driving
the
Eurozone
into
a
full-blown
recession.

And
recent
macroeconomic
data
stoked
fears
that
this
is
exactly
where
the
single
currency
area
might
be
headed.
Industrial
production
was
down
by
0.3%
in
November
month-on-month,
according
to
Eurostat
data
published
last
week.
Meanwhile
the
bloc’s
largest
economy
Germany
is
heading
for
a
second
year
of
recession
as
“multiple
crises”
continue
to
dampen
growth,
the
head
of
the
country’s
statistics
office
said
last
week.
The
German
economy
shrank
by
0.3%
in
2023
compared
to
2022.

“Inflation
is
falling
and
the
economy
is
in
danger
of
a
recession.
That
gives
policy
makers
the
opportunity
to
cut
rates,”
says
Michael
Field,
European
market
strategist
at
Morningstar.

The
ECB
Pushes
Back
Against
Market
Expecations

Christine
Lagarde
told
Bloomberg
at
the
World
Economic
Forum
in
Davos
last
week
that
the
bank
is
likely
to
cut
rates
in
the
summer.
She
joined
many
of
her
fellow
council
members
in
trying
to
dampen
expectations
of
an
imminent
easing.

Some
council
members
expressed
their
dissatisfaction
with
the
prevailing
market
expectation
that
the
central
bank
would
begin
to
cut
key
interest
rates
in
the
spring,
said
Dr
Ulrich
Kater,
lead
economist
at
Deka
Bank.
But
before
the
first
interest
rate
cut,
the
council
will
look
for
inflation
to
fall
to
2%
on
a
sustained
basis.
The
bottom
line
is
that
the
council
considers
it
very
unlikely
that
key
interest
rates
will
be
lowered
before
its
meeting
in
June,
he
said.

Katharine
Neiss,
chief
European
economist
at
PGIM
Fixed
Income,
does
not
expect
rate
cuts
in
the
next
few
months.

“Our
reasoning
is
derived
from
ECB
comments,
which
suggest
that
the
Governing
Council
would
like
to
see
easing
across
a
range
of
factors
that
influence
underlying
domestic
inflationary
pressure.

“This
includes
not
only
core
and
services
inflation,
but
wages
and
firm
markups
as
well.
That
would
put
Q2
as
the
earliest
period
in
the
frame
for
cuts.
Put
simply,
it’s
a
case
of
once
bitten,
twice
shy
and
policymakers
will
want
to
be
sure
that
the
inflation
genie
has
been
put
firmly
back
in
the
bottle.”

In
addition
to
the
expectation
of
early
rate
cuts,
the
ECB
will
also
try
to
tame
expectations
of
the
number
of
rate
cuts
(five
or
more
this
year),
says
Felix
Feather,
economist
at
Abrdn.

For
mortgage
holders,
that
means
lower
rates
might
still
be
in
the
far
distance.

ECB,
Fed,
BoE:
Don’t
Expect
Co-ordinated
Cuts

That
being
said,
the
ECB
has
much
more
leeway
to
cut
rates
than
its
counterpart
on
the
other
side
of
the
Atlantic.
Last
year,
markets
expected
that
central
banks
would
start
cutting
rates
simultaneously,
and
that
is
why
even
here
in
Europe
there
was
such
a
focus
on
the
Fed,
says
Morningstar’s
Field.
But
the
US
economy
is
in
danger
of
overheating
and

inflation
is
up
again,
so
the
Fed
has
a
more
difficult
task,
Field
ads.
Europeans
should
not
be
looking
at
the
US
to
lead
the
way
in
monetary
easing.

Currency
markets
have
plenty
to
sink
its
teeth
into
this
week,
with
the
latest
ECB
lending
sruvey
on
Tuesday
and
flash
PMIs
for
January
on
Wednesday.
These
two
data
sets
had
weighed
quite
heavily
on
the
euro
last
year
and
will
be
closely
watched
ahead
of
Thursday.
The
bank
sees
the
EUR/USD
largely
unchanged
around
the
1.09
levels
as
the
ECB
tries
to
re-position
for
a
data-dependent
approach
for
future
policy.

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