ECB, “wait and see”: rate cut can wait

Spotlight on Frankfurt where today, Thursday 7 March, the second meeting of the European Central Bank of 2024 will be held with expectations still oriented towards a new announcement (the third consecutive) of firm rates. THE first cuts they should, in fact, arrive in June. Disinflation continues, but it is not enough to change course, which is why caution prevails on the issue of monetary easing.

ECB, “wait and see”

For Martin Wolburg, Senior Economist at Generali Investments “February inflation data confirmed ongoing disinflation and various measures of underlying inflation continued to decline. That said, it has once again emerged that services inflation persists in the presence of strong wage growth. Overall, the ECB should have greater confidence in achieving the inflation target compared to the last meeting.”

However, “recent comments from Governing Council members suggest that it will not yet be enough to change course and markets have scaled back their cut expectations. Wage growth risks are still present and the second quarter will show whether or not they materialize. We expect President Lagarde to communicate a wait-and-see attitude and verbally pave the way for a first rate cut in June.”

Rate cuts can wait

“We continue to expect a 25 basis point cut by June and a cumulative 100 basis point cut over the course of the year, which is now largely in line with markets,” concludes the expert.

Also for Tomasz Wieladek, Chief European Economist, T. Rowe Price “it is probable that the forecasts for production growth will fall, conditioned by a slower cutting cycle compared to the last forecast in December, when the ECB forecast HICP inflation of 2.1% for 2025 and 2% for 2026. The forecasts for the core HICP, excluding the effects of energy and food, were 2.3% and 2.1% for 2025 and 2026 respectively. This time the HICP forecast is likely to be revised downwards to 2% for 2025. Financial markets could interpret this as a signal that the ECB will cut interest rates very soon.”

When could the scissors come?

However – he continues – “we expect the ECB not to substantially change its forward guidance on the timing of the cuts. There are several reasons why the Governing Council will continue to be cautious in communicating future policies. While nominal HICP inflation forecasts are likely to remain at 2% in 2025, core HICP inflation forecasts are likely to remain above 2% in 2025. Furthermore, the last strong HICP services inflation reading was 0.5% month-on-month for February, and gives the impression that euro area services disinflation so far has been marginal at best. This data was only released last Friday and would not have been included in the projections. The Governing Council will be very concerned about the persistence of services inflation and is therefore unlikely to provide strong forward guidance on whether a rate cut is imminent.”

Powell also stalls

The Federal Reserve also moves along the line of caution, not expecting inflation to “fall all the way down” to 2%, but what it wants to see is simply “more evidence” that gives “more confidence” that inflation is in a “sustainable” downward trend. Jerome Powell, president of the Fed, said this yesterday, answering questions from members of Congress during a hearing at the Committee on Financial Services of the US House of Representatives. “Let’s just be careful,” he stressed.

“We’re trying to use our policies to keep growth going and to keep the job market strong, while at the same time making further progress on inflation,” Powell said, trying to dodge questions about the so-called soft landing. The Fed should not be expected to “declare victory” for achieving a soft landing, he stressed.

The Fed’s number one also reassured that “there is no reason to think that the US economy runs any sort of short-term risk of falling into recession”.