ECB – data watching

Much like as was the case in January, expectations for any announcements of changes to monetary policy from the European Central Bank (ECB) at their March meeting were all but non-existent.

In the intervening six weeks between the two meetings, the market had pushed back fully pricing the first rate cut by the ECB from April 2024 to June 2024, as data remained somewhat mixed and ECB members were more vocal in pointing toward June 2024 as being the appropriate and prudent point to start any easing cycle. Additionally, over this period, the total number of rate cuts priced by the market for 2024 fell from close to six to around four.

The ECB duly delivered on this expectation – policy rates remained unchanged and there were very few amendments to the wording in the accompanying press release. However, government bond markets, initially at least, did rally after the announcement. The reason was a set of revised growth and inflation forecasts from ECB staff included in the release, which pointed to lower inflation than had previously been the case and indicating a return to around the 2.0% target by the end of 2025-2026. This time round, in the press conference that followed the announcement, ECB President Christine Lagarde was a little more forceful in her guidance regarding when to expect the first rate cut. In January, whilst not their central case, the ECB did leave the door open to a rate cut in April 2024 – if the incoming inflation data warranted it. In a far more candid approach this time, in answering questions as to when the first cut may appear, Lagarde stated that they would have “a little more” data by the time of the April 2024 meeting but would have “a lot more” by June 2024. For a central bank that once again stressed its decision-making process as being “data dependent”, this is about as strong a signal as can be given that June 2024 is more likely to be the month of policy action – provided, of course, that the incoming data support this.

In terms of where this leaves markets, they are still firmly in data watching mode. The expectation is now clearly for a rate cut in the ECB’s key interest rates in June 2024, and the question really is once the easing starts, how far will it go? This again will be a function of data: the ECB, like other major central banks, is trying to engineer the fabled ‘soft landing’, and the depth and pace of cuts in this cycle will be determined by the longer term impact of the restrictive policy seen to date, labour market conditions and broader macroeconomic factors (not least geopolitics), many of which are out of the direct control of individual central banks.

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