ECB Preview: Rate cut pondering, decision likely in June

KEY POINTS

A decision free meeting 

Depo rate is to remain at 4% as market has almost entirely priced out a March rate cut, following recent flurry of ECB speakers. Only Portuguese Governor Centeno has been open to cutting interest rate at this meeting. Otherwise, discussions on revised operational framework are reportedly advancing well, edging towards keeping a floor based system. Reuters (29 February) suggested a presentation may come as soon as 13 March, significantly earlier than “late Spring” as indicated by President Lagarde in January. In any case, these should have little to no ramification for the monetary policy stance in the short-term. 

Cautiously inching towards rate cuts

In the past few weeks, ECB speakers have expressed their (diverging) views on the timing of a first rate cut. Banque de France Governor laid out a more comprehensive approach which may help to strike a compromise: the timing of the first cut, the pace of the subsequent cuts, and the final level of the policy rate. During the Q&A, President Lagarde will likely report a first discussion on the matter. In doing so, she is likely to come back to ECB’s three pillar approach: (revised, for more see below) inflation outlook, underlying prices, and transmission of monetary policy, likely concluding time was not right not to decide nor to commit at such an early stage. Underlying inflation to remain key contentious item - especially when (strong) nominal wage growth is “netted” with very weak labour productivity.

A (long) list of items worth the wait

First and foremost Q1 wage (and national accounts data), amidst still ongoing good resilience of employment. Second, uncertain (higher) March HICP outturn amidst this year’s early timing of Easter. Third, more clarity on Fed’s stance which next meets on 20 March. Finally, although likely to be revised down (again), the growth outlook may not be bad enough to hasten a decision to cut rates. In light of the above, and amidst significant rate cut repricing by the market in line with our forecasts, we think President Lagarde is likely to strike a broadly neutral, data-dependent tone. 


We stick to our long-held June rate call

The following meeting being just four weeks away (11 April), we think it would take quite a suite of events (Fed dovish turn, sharp downside surprise in March flash inflation print, adverse shock to affect growth outlook) to force the ECB starting its cutting cycle without updated forecasts. In turn, while an April rate cut cannot be entirely ruled out, we maintain our long-held call of a 25bp rate cut in June – 3 in total this year.

ECB staff to revise down GDP growth

We think ECB staff is likely to revise euro area growth down owing to both weaker than expected Q4 GDP (0.0% q/q, ECB expected 0.1% q/q), and still subdued business surveys for Q1. All in all, 2024 growth is likely to be revised down by 0.2-0.3pp from 0.8% y/y projected in December, closer to our unchanged forecast of 0.3%. Narrative for 2025-2026 is unlikely to be significantly altered, both projected at 1.5% - possibly slightly lower in 2025. Crucial in our opinion will be to monitor underlying labour productivity assumption, feeding through unit labour costs, while forward looking indicators suggest ongoing strong wage growth.

Price wise, adjustment should be limited, also skewed to the downside

We think 2024 headline inflation projection is likely to be revised down by 0.2pp/0.3pp from 2.7%. This is due to slight downside in past inflation data as well as much lower gas and electricity futures (versus December). While core may also revised lower in the short-term, we think impact from lower GDP growth but higher unit labour costs are likely to broadly offset each other maintaining core inflation above 2% in the medium-run. In turn, we do not think updated forecasts will show headline inflation hitting the 2% target significantly earlier than H2 25 as it did in last December round.

    Disclaimer

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.

    All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document.

    Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.

    Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ.

    In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.

    © AXA Investment Managers 2023. All rights reserved