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ECB expected to hold fire while hinting at possible June rate cut

Markets expect Frankfurt to implement a sequence of rate cuts in the second half of 2024 but to proceed with cautious quarter-point reductions

European Central Bank president Christine Lagarde: ECB needs to be confident inflation is heading for 2% target. Photograph: Frederick Florin/AFP via Getty Images

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Cantillon
Thu Mar 7 2024 - 05:10

The European Central Bank (ECB) is not expected to change rates at its meeting today but will acknowledge that inflation is now on a lower path, likely opening the way for rate cuts later this year. When is the big question.

Markets expect Frankfurt to implement a sequence of rate cuts in the second half of 2024 but to proceed with cautious quarter point reductions until the data firmly indicates inflation is returning to the bank’s 2 per cent target.

ECB president Christine Lagarde said recently “the Q4 wage numbers are obviously encouraging”. However, she cautioned that policymakers need “to be more confident that the disinflationary process that we are observing will be sustainable and will take us to the 2 per cent medium term target”.

Services sector inflation, predicated on wage growth, has been highlighted as grounds for caution. The ECB was slow to get on board with inflation initially, relegating it to a post-Covid phenomenon until Russia’s invasion of Ukraine sent energy prices spiralling. As a result, its exit strategy promises to be slow. It won’t be fast enough to help an estimated 70,000 Irish households that are due to exit fixed-rate mortgage contracts this year. Markets expect three quarter-point ECB rate cuts this year.

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Pundits will parse Lagarde’s follow-up comments after the rate announcement today for clues as to when the first rate cut will come, with June considered the most likely. She will deflect questions about timing by saying the decision to change course, when it comes, will be “data dependent”, now a policymaker’s trope.

Fabio Panetta, Bank of Italy governor, summed it up last month when he said: “We need to consider the pros and cons of cutting interest rates quickly and gradually, as opposed to later and more aggressively, which could increase volatility in financial markets and economic activity.”

Even when they come down, rates are likely to remain restrictive for an extended period.

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