ECB on Hold But Forecasts to Boost Case for Cuts: Decision Guide
The European Central Bank is set to keep borrowing costs steady for a fourth meeting, though new economic projections should bolster arguments for cuts to start later this year.
(Bloomberg) -- The European Central Bank is set to keep borrowing costs steady for a fourth meeting, though new economic projections should bolster arguments for cuts to start later this year.
Analysts unanimously predict the deposit rate will be held at a record 4%, with most officials continuing to caution that it’s too soon to declare victory over inflation — despite it nearing the 2% goal.
Fresh quarterly forecasts produced by the ECB’s staff are expected to reveal a speedier journey back toward the target, giving policymakers more assurance as they contemplate unraveling their unprecedented bout of hikes.
But with the Federal Reserve and the Bank of England also still mulling when to begin loosening monetary policy, Christine Lagarde and her colleagues are in no hurry. The ECB president is likely to again signal an initial reduction in June, when there’ll be more clarity on whether Europe’s labor market is cooling.
That’s a timeline that investors and economists also now agree on, shifting the debate to how quickly rates will be lowered and where they’ll end up as the euro zone’s 20-nation economy remains mired in stagnation.
What Bloomberg Economics Says...
“We expect Lagarde to use downward revisions to the forecasts of the ECB’s staff economists to set the stage for a cut, but she’ll probably argue that policymakers can’t move until they have more data on wages.”
—David Powell, senior euro-area economist. Click here for full preview.
Lagarde will speak at 2:45 p.m. in Frankfurt, 30 minutes after the ECB’s policy announcement.
Interest Rates
Few of the Governing Council’s 26 members have voiced a preference for easing before June, by which time officials will have digested a slew of reports on wages — their top focus at present.
Many warn against jumping the gun, saying the consequences of a rebound in inflation would be far worse than those of keeping borrowing costs where they are a little longer.
“Even though it may be very tempting, it’s too early to cut interest rates,” Bundesbank President Joachim Nagel said last month.
February’s inflation reading came in a little hotter than anticipated — reinforcing such sentiments. But a Nowcast model by Bloomberg Economics showed inflation edged below the ECB’s 2% target for the first time since 2021 this week.
A key question is how strongly Lagarde guides toward a cut in the summer — and whether that completely excludes a move at the meeting before that, in April.
Another is how much easing will materialize. Economists polled by Bloomberg only see three quarter-point reductions in 2024, compared with four before the ECB’s last rate decision, though expectations diverge widely.
Investors, meanwhile, have significantly pared back their easing bets for this year and currently price less than 100 basis points of moves.
Economic Outlook
The ECB’s updated projections will probably show a softer inflation outlook for 2024, though analysts don’t see big shifts for 2025 and 2026, which policymakers deem more relevant.
The overall picture will remain one of price gains hovering around the target during the next two years, while economic growth picks up moderately.
A major concern is that underlying inflation, which is more sensitive to workers’ pay, will prove stubborn. The Bank for International Settlements warned this week that the current dominance of services in overall price growth may call for tighter policy.
Increases in negotiated wages moderated to 4.5% in the fourth quarter — still well above levels generally seen as consistent with 2% inflation. Additional data covering the same period is due Friday, while information on the first three months of 2024 will only trickle in slowly.
Operational Framework
Looking beyond the immediate debate over rates, the ECB is poised to agree on a new framework for how it implements monetary policy. The overhaul may allow the central bank to operate with a smaller balance sheet and still deliver stable funding conditions for banks, though it’ll take years to transition to the system.
While Lagarde will probably be hesitant to share details, she may disclose the timing of the eventual announcement — something officials familiar with the discussions said last month would come soon.
Internal Spat
Lagarde may also be quizzed about a mounting controversy over freedom of thought at the institution.
The spat centers on Executive Board member Frank Elderson, who — speaking at an internal event — questioned why the central bank would hire people “whom we have to reprogram because they came from the best universities, but they still don’t know how to spell the word ‘climate’.”
That in turn earned a rebuke from the ECB’s staff committee, which declared itself “shocked” at the remarks. Elderson himself issued a statement Wednesday, which — while stopping short of an apology — suggests alarm within the central bank that relations with employees are deteriorating rapidly.
--With assistance from Joel Rinneby and Aline Oyamada.
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