Commenting on today’s ECB decision, Anna Stupnytska, Global Macro Economist at Fidelity International, said:
“At its March meeting, the ECB left its policy rates and guidance unchanged, in line with expectations. The downgrade to both growth and inflation forecasts for 2024-25 came across as a dovish signal, and in her press conference President Lagarde cautioned that risks to growth are still tilted to the downside.
“At the same time, Lagarde emphasised that while progress on inflation has been made, more is required for the Governing Council to be sufficiently confident inflation is heading back to target.
“Since early 2024, we are seeing some tentative signs of green shoots in Euro area activity, as witnessed by modest improvements in the PMIs, especially in services across the board. Consumers are getting more optimistic on lower inflation and higher growth in real disposable incomes as of late. While this improvement is encouraging, we agree with Lagarde’s comments that risks to growth are skewed to the downside, as tight policy continues to transmit into the real economy and the external sources of growth, including China’s economy, remain weak.
“At the same time, the disinflation process is well under way, with wage growth in Q1 2024 being the remaining piece of the inflation puzzle for the ECB. Signs of moderation are already emerging, as Lagarde also noted in the press conference today. Once most data is available in late April and in the likely scenario of it pointing to easing wage pressures, the ECB should be ready to kick off the rate cutting cycle which we expect to be at the June meeting.
“The path from there, however, will in part depend on the Fed, which we believe might have to push back the start of its own cutting cycle to later in the year, given continued resilience of the US economy and evidence of inflation persistence. So, while the ECB may well be the first major central bank to start cutting rates, it might not be able to do much more until the Fed joins in.”
Also commenting on today’s ECB news, Altaf Kassam, EMEA Head of Investment Strategy and Research at State Street Global Advisors said:
“The ECB left its policy rate unchanged again today, as we predicted. This lends more credence to our view that they will only start cutting in June and should execute four 25 basis points cuts for this year – roughly in line with where market pricing is right now.
This hawkish pause was all but ‘nailed on’, as it was extremely unlikely that the ECB would move before the Fed. With the chances of a Fed cut now almost completely priced out for May, we see the odds for an ECB cut in April to have shrunk close to zero as well, hence our call for a June start to the easing.
It seems that February’s eurozone inflation data has given the Governing Council some worry, coming in above consensus, and leaving even typically dovish GC members reluctant to push hard for earlier rate cuts. The message seems to be that the Bank needed to wait for more evidence that inflation was sustainably coming down to their 2% target before considering easing. That said, with the official inflation forecasts lowered as well, we do see a clearer path to June’s easing.”
