The Strategist

Getting ready for the summer cut

European Central Bank (ECB) policy makers are meeting on Thursday to discuss the latest inflation developments and announce their policy path for the weeks ahead. We expect no immediate change in direction, but we will closely monitor the press conference for any hints at possible rate cuts for late spring or early summer 2024.

Tina Jessop, Senior Economist, LGT Private Banking
Temps de lecture
10 minutes
Strategist EZB
© Shutterstock

Inflationary momentum has certainly cooled enough for the ECB to start discussing the possibility and timing of rate cuts. While year-over-year inflation numbers are still above the 2% target, annualised average percentage changes over the past three months are now either in line with the 2% target or have fallen below this threshold. Importantly, this includes core inflation numbers which exclude volatile energy and food prices, as well as service inflation. This is crucial since the service sector has the largest exposure to wage growth. 

What is the ECB waiting for? 

The Eurozone economy has been stagnating for most of 2023. Purchasing Manager Indices in the manufacturing and services sectors are weak, consumer confidence is suppressed (albeit improving) and labour markets are showing signs of easing at the margin. With the ECB deposit rate currently at 4.0%, we deem it as restrictive to economic growth. The longer it stays at the current level, the larger the impact on growth. Monetary policy acts with a lag. 

Yet, after the recent inflation rout, the ECB wants to be “confident” that inflation has “sustainably” returned to 2% over the mid-term. Speaking at the World Economic Forum in Davos, ECB President Christine Lagarde emphasised that the ECB will remain restrictive for as long as necessary to ensure this target is met and to stave off the risk of a potential second inflation wave. In this context, President Lagarde also highlighted the importance of wage growth. Up until now, Eurozone labour markets have largely defied the adverse impact of higher interest rates. Unemployment is at a record low and wage growth remains at levels too high to be consistent with the 2% inflation target. For inflation to subside permanently, wage growth will have to ease. However, the ECB will only be able to gain a better understanding for 2024 wage dynamics once the impact of the latest wage round negotiations is released in April and May.

ECB interest rate cut possibly in April or June

From a timing perspective, the ECB’s next  monetary policy decisions are scheduled for 7 March, 11 April and 6 June. For the March meeting, it will be too early for the ECB to feel sufficiently comfortable about a sustainable return to the 2% target. We therefore expect the first rate cut to come in April or June. The timing will depend on the development of economic growth and inflation in the coming weeks and months. Should the ECB wait until June, we would not exclude the possibility of a 50 basis point cut in the ECB deposit rate (instead of a moderate 25 basis point cut), as the ECB may - once again - find itself behind the curve and needing to catch up to prevailing economic conditions.

Prendre contact