As widely expected, the European Central Bank (ECB) kept its policy rates on hold today. Following recent hawkish comments from the central bank, the focus was on what President Lagarde would signal about the timing of rate cuts. While she noted that it was premature to discuss monetary easing, her broader narrative seemed to suggest otherwise.

Recent central bank pushback

The euro area is hovering around stagnation, with recent activity data pointing to a continued loss of momentum. Inflation has fallen rapidly in recent months, declining faster than it initially rose. Against that backdrop, markets had unsurprisingly latched on to the idea of near-term rate reductions, with many analysts suggesting that the first cut could come as early as March. Yet, in recent weeks, ECB members have lined up to pushback at the idea of a March rate cut, pointing at three key factors:

  • Cutting policy rates prematurely would risk reigniting inflation pressures and a renewed hiking cycle.
  • Important wage information, which will be a telling indicator of the job market's health, will only be available in April (after the ECB's April meeting).
  • Red Sea shipping turmoil poses an upside threat to inflation.

Last week, during a Bloomberg interview at Davos, President Lagarde topped off the hawkish comments by remarking that it’s likely the ECB will cut rates in the summer.

Today’s chatter

Lagarde commented that she still “stands by” her previous comments that summer cuts are likely. Yet, her broader narrative and evaluation of the economic backdrop seemed to take on a more dovish tone. She noted that underlying inflation has continued to decline and is expected to ease further over the course of the year. She acknowledged that much of the broader wage data will only be available in April but also commented that they could already see that wage growth is declining. In all, while no one would deny there are risks to the outlook, Lagarde’s pushback against market pricing for near-term rate cuts was somewhat unconvincing.


The ECB will remain data dependent, but with the price and wage data they focus on already showing good progress, a rate cut within the next few months, potentially April, feels likely. Furthermore, since the Euro area economy is barely avoiding recession, once the ECB starts rate cuts, it will likely act with some urgency, introducing a rapid series of reductions aimed at stabilizing economic growth.


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