ECB Preview: Early rate cut pushback in an interim meeting


Key points:

  • We expect next week's ECB Governing Council meeting to be decision-free, uneventful. Though, the ECB is likely to "officially" push back against early rate cuts currently priced by the market.
  • Most recent data on inflation and economic activity have been slightly lower than in latest staff forecast, not enough to warrant a change in its policy stance.
  • Our baseline is unchanged. We expect the first rate cut to occur in June when the ECB will have full review of wage data.  

The economic situation has little changed since latest ECB projections, with a downward skew. December headline inflation (2.9% y/y) was lower than ECB's forecast - Q4 2023 was projected at 2.8% y/y but finally reached 2.7%. On GDP growth, their Q4 projection stands at +0.1% q/q. The latter is in line with our expectations, but possibly on the optimistic side accounting for latest data. However, we don't think such minor downside news would shift the ECB's policy stance. Besides, while headline Q4 GDP growth is likely to be uninspiring, its composition may provide some reinsurance with private consumption remaining dynamic (in our forecast).

We expect next week's ECB Governing Council meeting to be decision-free. That would be motivated by no clear further progress towards the three key criteria of the ECB monetary policy stance, namely strength of the transmission of the monetary policy, underlying inflation, and the inflation outlook.


We expect the ECB to "officially" push back against early rate cuts priced by the market, compiling a flurry of comments in January. Even Philip Lane, known as dovish admitted it would be premature cutting rates before having a full review of wages data that should be release by end of April. C.Lagarde also clearly stated in Davos that any rate cut before late Spring was unlikely. She and K.Knot also argued that if financing conditions were too weak, this would have the opposite effect, as they would have to maintain their restrictive policy for longer. Finally, as we noted in December, it is worth noting that a sense of wide consensus remains at play, against early rate cuts, within the Board of Governors. 

Our baseline is unchanged since September. We believe the ECB is likely to fight against market rate cut expectations in coming months until it presents the March projections. But barring any strong downside surprise to inflation in coming prints and/or much weaker growth outcome, we foresee the ECB to wait until June when it will have a full review of wages data consistent with their view and inflation converging permanently to 2%.

    Disclaimer

    The information on this website is intended for investors domiciled in Switzerland.

    AXA Investment Managers Switzerland Ltd (AXA IM) is not liable for unauthorised use of the website.

    This website is for advertising and informational purpose only. The published information and expression of opinions are provided for personal use only. The information, data, figures, opinions, statements, analyses, forecasts, simulations, concepts and other data provided by AXA IM in this document are based on our knowledge and experience at the time of preparation and are subject to change without notice.

    AXA IM excludes any warranty (explicit or implicit) for the accuracy, completeness and up-to-dateness of the published information and expressions of opinion. In particular, AXA IM is not obliged to remove information that is no longer up to date or to expressly mark it a such. To the extent that the data contained in this document originates from third parties, AXA IM is not responsible for the accuracy, completeness, up-to-dateness and appropriateness of such data, even if only such data is used that is deemed to be reliable.

    The information on the website of AXA IM does not constitute a decision aid for economic, legal, tax or other advisory questions, nor may investment or other decisions be made solely on the basis of this information. Before any investment decision is made, detailed advice should be obtained that is geared to the client's situation.

    Past performance or returns are neither a guarantee nor an indicator of the future performance or investment returns. The value and return on an investment is not guaranteed. It can rise and fall and investors may even incur a total loss.

    AXA Investment Managers Switzerland Ltd.