ECB Preview: Mainly an interim assessment towards June rate cut

A decision free meeting

Depo rate is to remain at 4%. Policy guidance at the time of the March meeting was very clear: “we will know a bit more in April, and a lot more in June”. Meanwhile, latest activity data are consistent with ECB downwardly revised March baseline foreseeing tentative signs of improvement in the short-term projecting euro area Q1 GDP growth at +0.1% q/q. We agree although we have been flagging downside risk recently. “Flash” March inflation eased further (0.2pp) yielding headline and core at 2.4% y/y and 2.9% y/y respectively. Although prints came in lower-than-expected, services inflation remained at 4% for a fifth month in a row showing still resilient domestic pressures to prolong ECB’s concerns about “high domestic inflation” mentioned at the March meeting.

Building data dependent large majority for June rate cut 

Next week’s meeting comes just four weeks from the previous one, naturally reducing the amount of new information available from March’s fresh forecasts. Over the next few weeks, preliminary estimates of eurozone’s Q1 24 national accounts (30 April) as well as Q1 24 wage growth, including ECB’s series (likely to be released between the second and third week of May) will be released. These will be crucial outturns to check ECB’s key assumptions underpinning the March forecasts: expected labour productivity pick-up and reduced profits absorbing increased labour costs and input into Eurosystem’s staff forecast update at the June meeting. Meanwhile, we have noticed increased Governing Council’s view convergence for the start of the easing cycle. In other words, the bar is set to be very high not to cut in June.

What may come next after June – watch for market guidance

Firmly pre-committing to a June rate cut bar a significant data/event surprise, President Lagarde is likely to be asked about the shape of the easing cycle during the Q&A. We do not think that she will be in a position to say much at such an early stage, but sticking to data-dependence in the context of its three pillar strategy, namely, inflation outlook, underlying inflation and the strength of monetary policy transmission. We think she is likely to keep a prudent tone – all but declaring final victory over (domestic) inflation. Similar to the March meeting, she may venture onto commenting with regards to market expectations – 91bps worth of cuts by year-end at the time of writing.

No change to our rate call

We maintain our long-held call of a 25bp rate cut in June – three in total this year.