MNI ECB WATCH: ECB To Hold With Cuts Seen By Mid-Year

The European Central Bank is expected to hold key interest rates at 4.00% this Thursday, amid signs that an early consensus is forming for a first cut of the cycle in June.

While the Governing Council is likely to resist attempts by some members to discuss the timing of cuts this week, the topic is no longer taboo. Since December’s partial about-face by Executive Board member Isabel Schnabel prompted by concerns over slowing growth, several of her fellow hawks have accepted that the first cut of the cycle could come this year and President Christine Lagarde saying “it’s likely” by the Summer. (See MNI INTERVIEW: ECB Could Discuss Cut Timing In Jan-Centeno)

But the ECB will continue to push against market expectations for around 140 basis points in cuts in 2024, with only a small number of Governing Council members seeing rates pricing as realistic, and Lagarde noting that overblown expectations make the job of containing inflation more difficult. (See MNI SOURCES: "Biggest Minority" Favours ECB June Cut)

Despite an increase in headline CPI to 2.9% in December, inflation remained a notch below expectations after sliding from 4.3% in September, while core slowed to 3.4%. (See MNI SOURCES: ECB Needs Sub-3% Core Inflation To Consider Cuts)

INFLATION OUTLOOK

Members are now divided as to whether inflation will continue to slowly decline this year towards the 2% target or reach a plateau, with some prepared to argue for cuts by April if March’s Eurosystem projections place it below 2% by 2025. This week’s Bank Lending Survey will be closely examined for fresh signs of a slowing economy while the ECB will also be seeking more data on the outcomes of wages negotiations, with eurozone unemployment at a record low 6.4% in November.

Some signs of softening are appearing in the labour market, the ECB’s Vice President Luis de Guindos said recently, though former ECB economist Riccardo Trezzi told MNI that that a slow-down in hirings is normal after record-breaking years. (See MNI INTERVIEW: ECB Heading For Spring Cuts-Ex ECB Economist)

Chief economist Philip Lane has said that national accounts released at the end of April will provide a full picture on wage increases and employment. This would suggest that a first cut is more likely in June.

Still, other upside risks remain, with the Council likely to take note of the potential for developments in the Red Sea to impact supply chains and energy prices.