MNI ECB WATCH: ECB Likely To Point To June Cut

The European Central Bank is expected to hold its deposit rate at 4.00% on Thursday, but to signal that it could be ready for a first cycle cut in June as inflation eases.

While Christine Lagarde is expected to continue to stress a data-dependent approach to policy setting, sources have told MNI that if guidance for a likely 25-basis-point cut is not included in the statement the ECB president could prepare wording to that effect to be used in answer to a question at the press conference.

A growing number of policymakers are comfortable with market pricing implying as many as six rate cuts by September 2025, though more hawkish Governing Council members remain concerned by the potential for inflation to spike again. They are likely to argue against providing clear guidance beyond a cut in June, when fresh projections and wage data will be available. (See MNI SOURCES: ECB Still Divided Over Guidance As It Nears Cuts)

Policymakers expect rates to remain in restrictive territory for some time even as cuts begin, with some pointing to 3% as a potential level at which to pause before further easing. Others will argue for cutting quickly at the onset of the easing cycle. (See MNI INTERVIEW: ECB To Cut 50BP, Then Wait And See- Bini Smaghi)

BANK LENDING SURVEY

The ECB’s first quarter Bank Lending Survey released earlier on Tuesday pointed to potential tighter lending standards in coming quarters, which will provide more fodder for doves.

But the ECB will keep a wary eye on the Federal Reserve, as speculation builds that it might cut rates less this year than previously expected. More hawkish officials in particular will warn of the dangers for the euro and imported inflation of outpacing the Fed in the easing cycle, though the broad view within the ECB is that only a “significant divergence” between the two central banks’ rate paths would be of concern. (See MNI SOURCES: ECB Wary Of Any "Significant Divergence" With Fed)

Bank of Spain Governor Pablo Hernandez de Cos has said that market pricing for interest rate cuts was “compatible” with returning to the 2% inflation target in 2025, and eurozone headline inflation declined to 2.4% year-on-year in March, lower than expected and down from the previous month’s 2.6%. But services inflation was at 4.0% for a fifth consecutive month, with some on the Governing Council seeing this persistence as a risk for derailing the overall downward trend in inflation and pushing up wages.

Another source of uncertainty for the ECB is whether eurozone growth will pick up in the second half of the year. On a recent MNI Webcast, Bundesbank president Joachim Nagel said the probability of rate cuts before the summer break “is increasing” but that this does not mean any “kind of automatism” or clear sequence once cuts begin.

Bank of France Governor Francois Villeroy said the ECB should adopt an approach of “agile gradualism” after the first cut and that there was an “emerging support” for this at the last March meeting.