March ECB Forecasts Key To Timing Of First Rate Cut

In January euro area headline inflation eased to 2.7% from 2.9% in line with the ECB’s December forecast for Q2 2024. Core is stickier easing to 3.2% from 3.4% and above the ECB’s 3.2% Q1 2024 projection. The forecasts will be updated for the March meeting on March 7, and with recent CPI data moderating faster than expected there is a chance that achieving the inflation target could be brought forward. The market expects a rate cut by June.

• On the weekend Spain’s Governing Council member de Cos said that the March “projections will be key” in helping the ECB decide if it is confident that it will meet its 2% target and can thus start easing. Confidence that inflation targets will be met is something central banks globally are trying to establish.
• De Cos believes that disinflation is “advanced” and will continue over “coming quarters”.
• The dovish Bank of Italy Governor Panetta also thinks the move towards the ECB’s target is “advanced” and that the moderation towards 2% is “rapid” and that core hasn’t proven sticky. Current ECB forecasts don’t have headline inflation back around target until H2 2025 and core at the end 2025 but this may be brought forward given the moderate start to 2024 since Panetta sees downside risks to inflation. As a result he said that the “time for reversal of the monetary policy stance is fast approaching”.
• Bank of Portugal Governor Centeno is also positive about the inflation outlook but warned that easing should be gradual and that if it is rapid it signals that “something isn’t going well”. He also said that rates won’t return to the very low levels seen before this cycle as they are “perverse for economic growth and financial stability” and “ideally” rates will stabilise around neutral of “close to 2%”.