Euro area: ECB on hold; April cut? Maybe

As expected, the European Central Bank (ECB) decided to keep rates on hold at today’s meeting. According to President Lagarde, the consensus around the table was that it was too early to discuss rate cuts.

The key bits of forward guidance language were unchanged: “The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. Based on its current assessment, the Governing Council considers that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal.” The statement (and Lagarde) reiterated that their decisions are data dependent.

A touch dovish? Opening the door to an April cut? Maybe. Saying all that, it felt a little on the dovish side, lacking some of the forceful one liners of previous press conferences from Lagarde that pushed back against market pricing. In her answers to questions there was also a sense I think of opening the door to doing something in April – but also of that not being a central case as such (see below).

Unsurprisingly, there was a lot of focus from journalists on the timing of a first rate cut in the press conference – particularly around what data they will be watching and when they will get that data. I took a general read from her answers that March was too early, April might not be, but that the central case was more likely the summer:

• In terms of key data, she pointed out that at their next meeting in March they will have a new set of staff projections for growth and inflation as well as two more inflation prints.
• But by April they will have more data to go on. She said they will have a lot of information “in coming months.” She said that they will get wage data on some 40% of the workforce over the next few months. Asked by a journalist at the end on Q1 wage data expected from Eurostat at the end of April she said they were looking at lots of data and would not draw a conclusion from a date of publication… but that he was correct about the date of publication.
• A week ago to Bloomberg, she was asked if there could be majority support for a rate cut in the summer and said “I would say it’s likely too” but also that “I have to be reserved, because we are also saying that we are data dependent, and that there is still a level of uncertainty and some indicators that are not anchored at the level where we would like to see them.” She said at the press conference today that she stood by her comments.

Also working against an early rate cut – upbeat on the economy… On weakness in the economy, Lagarde took a relatively upbeat slant. She pointed to positives in the PMIs (including that they are improving), saying that forward-looking survey indicators point to a pick-up in growth and also acknowledged that the unemployment rate was at lows.

…and need to be further along in terms of disinflation: She said that “I think in terms of an overall evaluation of our policy trajectory which many of you are after, we need to be further along on in the disinflation process before we can be sufficiently confident that inflation will actually hit the target in a timely manner and in a sustainable way...”

But could they cut in April if wage growth hasn’t fallen back much? Maybe: Even if the wage growth still looks relatively robust in April, my impression was that they might cut depending on the data and context. On wages, she again emphasised that the context in terms of profits was important: Their assumption is that profit margins will absorb pay growth to help stop it feeding through into inflation and she said that they are seeing signs of that. At any rate she also said that on their data wage pressures have started to ease where they are seeing stabilisation in their wage tracker… More broadly, Lagarde was keen to emphasise that a whole range of data will matter and that it wasn’t all about wages. She (inevitably, with all the focus on dates) reiterated that they are data, not date dependent.

My central case is still that we see 75bps of rate cuts from the ECB this year, at a gradual 25bps a quarter pace, starting in Q2. But I am not convinced they will cut as early as April.

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