The European Central Bank convenes tomorrow, with markets excited to see when interest rate cuts will begin. All eyes are on ECB President Christine Lagarde's address. While the consensus leans towards another wait-and-see approach in April, followed by an initial decrease in June, the easing of inflation pressures paves the way for monetary policy normalization. But as always, the final call rests with Frankfurt. To shed light on potential outcomes, Investing.com compiled analysts' insights ahead of the April 11th meeting.
Franck Dixmier, Global CIO Fixed Income of Allianz Global Investors
The European Central Bank (ECB) has little reason left to delay the normalization of its monetary policy. The slowdown in activity in the euro area is now behind us. But above all, the ECB sees its forecast of inflation heading towards its target being confirmed. The latest inflation data of +2.4% year-on-year in March (compared to +2.5% expected and +2.6% in February) is good news. This downward trend is also reflected in core inflation (+2.9% compared to +3% expected and +3.1% in February). These data support the significant downward revision of the ECB's inflation forecasts for the next three years presented at the March 7 meeting (+2.3% in 2024 compared to the previous +2.6% and a return to the target of +2% in 2025).
It is therefore likely that the turning point in monetary policy will be discussed at the April 11 meeting, and in particular the timing of the first rate cut. While June seems to be the consensus of the Governing Council, the timing and size of future rate cuts remain open. We expect a measured speech, which confirms the very high probability of a first cut in June and presents it as a first step towards the normalization of policy. But the ECB will likely insist that future rate cuts are not a given and will depend on the expected path of inflation.
Market expectations are extremely high, with a 98% probability of a 25bp cut in June. However, if the ECB's comments disappoint investors, tensions could arise in bond markets amid growing uncertainty about the timing of the Fed's first rate cut, with a 72% probability of a first cut in June.
We do not believe that this slight gap between the ECB and the Fed should hinder the ECB, which should reiterate that it takes its decisions autonomously.
Peter Goves, Head of Developed Market Debt Sovereign Research of MFS IM
We do not expect any changes to interest rates from the ECB this week. Lagarde could not have been clearer that the Governing Council is waiting for more data (particularly on wages, profits and the labor market) before committing to a change in monetary policy. In our view, therefore, this will be a "placeholder" meeting. At the Watchers Conference, Lagarde clarified that the ECB will have more data by June and that, if the baseline scenario is confirmed (as is largely happening), the Governing Council could quickly begin to scale back some of its monetary policy measures.
It is therefore likely that the debate on tapering will gain momentum, although the ECB will refrain from making a formal commitment to do so and will maintain its data-driven approach. In our view, the ECB could cut before the Fed if the fundamentals, its reaction function and the inflation target warrant it. Lagarde is almost certainly not going to commit to a precise path for rates when the ECB reviews its position, but we believe that multiple cuts cannot be ruled out if the data justifies it.
In our view, the ECB is likely to cut the refinancing rate by 25bp in June. This conviction is based on the weak growth outlook (with below-potential growth for many quarters to come), the decline in inflation, a transmission that is having its effect on the economy and clear communication from the ECB. In an environment of tight financial conditions and a cooling labor market, an unexpected rise in real interest rates increases the risk of excessive tightening. We therefore do not rule out a further widening of the UST-Bund spread.
Gilles Moëc, AXA Group Chief Economist and Head of AXA IM Research
We do not expect any decision from the ECB this week. Last month, Christine Lagarde hinted at possible action in June, but the Governing Council will have the opportunity this Thursday to report on the "interim assessment" of the macroeconomic situation in the Euro Area. The central bank's decision to revise down its inflation forecasts seems to be justified by the March CPI data: disinflation continues to be faster than market expectations. However, the resilience of service prices remains a sore point. The message from surveys on future price behavior of companies and still anemic domestic demand are nevertheless reassuring about the amount of inflationary pressure still existing. It seems that the European economy is for now stabilizing at low gear. It is true that the momentum of nominal wages, in contrast to slower nominal inflation, will support purchasing power, but fiscal headwinds are accumulating before the impact of monetary tightening fades. We continue to believe that the ECB will not wait for inflation to fully converge to 2% and that it will proceed with a first rate cut in June, even if the Fed decides to wait instead.
Giorgio Broggi, Quantitative Analyst at Moneyfarm
In recent months, markets have steadily reduced the number of expected rate cuts, to the point of pricing in less than those promised by the Fed, without in the least affecting the stock market rally. However, it will be crucial that today's US inflation data is not too negative and that inflation fears remain contained.
In this more cautious climate regarding inflation and US monetary policy, it will be incredibly interesting to analyze Lagarde's narrative at the ECB conference. Although it is almost certain that there will be no cuts at this meeting, this narrative could support fears that the European Central Bank is ignoring the positive signals coming from inflation in the Old Continent and prefers, timidly, to wait for the Fed to cut first. If this were the case, it would be a serious mistake, in my opinion, especially if the reflationary script were to begin to materialize more clearly in the United States.
Alexander Batten, Fixed Income Portfolio Manager at Columbia Threadneedle Investments
The ECB meeting in April is likely to be quiet and pave the way for the June meeting. In fact, the idea has recently spread that the cutting cycle will start in June, as the central bank will have gathered enough information on wages by then, rather than a series of good news on wage developments to justify the start of a cutting cycle. This distinction suggests that there is a high probability that the ECB will remain on hold in June. 25 basis point hikes are largely favored, but the presence of sluggish growth dynamics in the Eurozone, unlike other regions, would justify repeated cuts.
Tomasz Wieladek, Chief European Economist, T. Rowe Price
The German economy, the manufacturing engine of Europe, remains very weak in the first quarter. The French manufacturing sector shows a similar picture. The economic performance of these two economies will be weak this year due to fiscal consolidation.
On the other hand, Italy and Spain are performing better thanks to the strength of the service sector. The ECB will have to take all these factors into account. However, in the past, the German and French cycles have led the other countries. As a result, we believe that today's data adds to the evidence that the ECB could start a cutting cycle in June and cut 4-5 times this year.