ECB Preview: Early rate cut pushback in an interim meeting

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%.