MNI SOURCES: ECB Cut Expectations Range From 50-100BP In 2024

Expectations on the European Central Bank’s Governing Council for rate cuts this year currently range between 50 and 100 basis points in 25bp steps, with more dovish members looking for an earlier start but the largest bloc coalescing around a June commencement for easing and then lowering the deposit rate twice more, Eurosystem sources told MNI.

The speed and timing of any rate cut by the Federal Reserve could also influence the ECB’s behaviour, though wages and inflation remain the prime driver of the Governing Council’s reaction function, sources said, as stronger-than-expected U.S. January inflation pushed back expectations for a first Fed rate cut back to June.

“At times of change of cycle, what other central banks do, especially the Fed, has more impact, or is looked at more closely. But we have to focus on ourselves regardless of what they decide,” one Eurosystem official said.

While later Fed cuts could strengthen the hand of those calling to wait until the June meeting to begin the easing cycle, another source maintained that the ECB will not have the luxury of delaying given the divergent growth outlooks of the U.S. and the eurozone, saying Frankfurt needed to be “much less passive”. (See MNI SOURCES: "Biggest Minority" Favours ECB June Cut)

MARCH PROJECTIONS

While the chances of a cut as early as March are seen as extremely low, confirmations for disinflation in the ECB’s next set of projections could result in a change to that month’s statement, perhaps to modify current language saying rates should stay at levels which “will make a substantial contribution” to reaching the inflation goal, another source said.

April cannot be ruled out for a first cut, but the fact that wages data is released at the end of that month would argue for waiting until June to confirm inflation’s trajectory, according to several sources.

“June would appear the favourite month for a host of reasons – full transparency on wage data and perhaps the fact the economy hasn’t gone into a sharp downturn yet gives us an opportunity to wait,” said one official, noting however that the Bank Lending Survey and March inflation data would be available by the April 11 meeting.

“The consensus is building around cuts before the summer, however, I still think the timing, depth and sequencing of cuts will be both data- and projection-dependent,” the source said, adding that while some members would prefer to wait until the second half of the year others would be happy to start as soon as possible.

MARCH STATEMENT

While precise sequencing is difficult to anticipate, three 25-basis-point cuts this year, in June, September and December, would be a reasonable assumption, said another.

“Even if inflation is sticky between 2 and 3%, not my base case, it doesn't preclude rate cuts. There is still room to ease from a 4% deposit rate and remain in restrictive territory,” the source said. “Still I don't see that inflation is as sticky as some think.”

Either way, a fall in February inflation could allow for March’s statement to signal cuts ahead, perhaps by removing a reference to upside risks to prices, said a source at another central bank, who was leaning towards April for the first rate cut.

“If you say confidently that there aren't second-round effects, then you don't need to wait until May,” the official said. Still, the effect on the real economy of delaying until June before cutting would be minimal, the source conceded, adding that either way reductions should proceed in 25-basis-point increments, with two or three of them likely this year.

Another agreed, arguing that a later 50bp move would be no substitute. “I think it is good that the movements are 25 basis points. I wouldn't want to have to do 50 because it would be read as a policy error,” this further source said.

An ECB spokesperson declined to comment.