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ECB preview: Goldman updates rate path forecast ahead of policy meeting

Published 07/03/2024, 10:34 pm
Updated 07/03/2024, 11:06 pm
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(Updated - March 7, 2024 7:03 AM EST)

The European Central Bank (ECB) Governing Council is set to meet for its monetary policy meeting on Thursday, with Goldman Sachs economists forecasting a decision to keep interest rates unchanged.

“We look for the policy language in next week’s statement to remain unchanged and reiterate that current rates are “making a substantial contribution” to disinflation,” economists at Goldman Sachs said in last week’s note.

Goldman believes the ECB will maintain rates at “sufficiently restrictive levels for as long as needed," and expects policy decisions to continue to be guided by data.

With inflation projections expected to be lowered, the economists foresee the Governing Council recognizing additional advances toward achieving the inflation target.

“We expect President Lagarde to note in the press conference that the projections look encouraging, that the Council remains data-dependent, but that the Council needs more confidence that inflation will return to 2% in a timely and sustainable manner,” they wrote.

Lagarde might also indicate the need for "a few more" months of data to bolster confidence in the inflation forecast.

Looking ahead, analysts at Goldman Sachs now expect the first rate cut in June, following two consecutive months of unexpectedly high core inflation, which diminish the likelihood of an earlier reduction.

However, a quicker disinflation rate is expected than what is projected in the recent staff updates.

“Our view is based on the unwind of post-pandemic supply shocks driving a disinflation process in the Euro area,” said Goldman’s economists.

“We therefore continue to look for the Governing Council to proceed with back-to-back cuts until reaching a terminal rate of 2.25%. Our baseline now embeds 5 cuts in 2024 (vs 6 previously) and 2 cuts in 2025 (vs 1 previously), all in 25bp steps.”

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