ECB: On hold and sounding on track for a June cut

As was widely expected, the European Central Bank (ECB) left policy unchanged at their meeting today.

They left the broad guidance language unchanged, and President Lagarde continued to emphasise that they wanted more data, more evidence, before cutting rates. There was a fairly pointed mention to the June meeting rather than the April meeting as an implied first potential date for a rate cut (see below).

Moving towards a rate cut: The staff projections for inflation were revised lower and are – give or take – inflation target consistent by 2025/26. Lagarde acknowledged the decline in inflation. She said that: “…we are making good progress towards our inflation target and we are more confident as a result.” However, she also said that they weren’t sufficiently confident yet. She said the general sentiment around the room was that “What we are seeing in the data, at the moment, are indicating certain movements directionally good but it is not strong enough and durable enough, for the moment, to give us sufficient confidence.”

Not April, probably June: According to Lagarde (and this is a point made by other ECB speakers of late too): “We clearly need more evidence, more data… We will know a little more in April, but we will know a lot more in June.” She said later that this difference matters, given they are data dependent. She also said that they have (only) “Just begun discussing the dialling back of our restrictive stance.”

But the data still needs to move the right way: I think it would be wrong to regard the ECB as having boxed themselves in to a June rate cut. President Lagarde may be clear that they will have a lot more data to go on by the June meeting, but ultimately that data still needs to point in the right direction. She continued to emphasise their data dependency (and that their decision-making process will be independent of anything the US Federal Reserve decides to do).

Special highlight for domestic inflation: Lagarde was very clear that one aspect of inflation is not moving in a positive direction, namely “domestic inflation”, which is largely informed by services inflation and very sensitive to wages. She again went into more data on the array of wage and labour market data that they will be looking at, but this remains a clear area of focus for them. 

Gradual pace of cuts? Maybe… the data will decide: Lagarde wouldn’t (yet) be drawn on the question of the likely pace of rate cuts. When asked a direct question on this she said that: “I would use the analogy of seasons and episodes. We are still in the holding season. We will move to the restrictiveness season – that will take a while – and once that season is over, we will move into a normalisation season. But, you know, if that is the definition of gradual, so be it. But I would not commit to any kind of pace, rhythm, magnitude because we will continue to be data dependent.”

In terms of my own forecasts, I stick to a central case assumption of three 25bp rate cuts this year from the ECB starting in Q2 (likely June).

The views expressed are those of the speaker at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.

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