As widely expected, the European Central Bank (ECB) kept its key policy rates on hold today. The interest rate on the main refinancing operations, the marginal lending facility, and the deposit facility remain at 4.5%, 4.75%, and 4.0%, respectively. Since the last ECB meeting in January, markets have adjusted their rate expectations, pushing out the date of the first rate cut from March to June. At today’s meeting, ECB President Christine Lagarde essentially affirmed market timing, noting that while they are confident that inflation is progressing towards the ECB’s 2% target, they are not yet “sufficiently confident.” The ECB needs more evidence that inflation is trending back to 2%, but, as Lagarde noted, they’ll “know a little more in April,” but they will “know a lot more in June.”

Economic forecasts

The ECB published its updated full-year average staff projections. GDP growth was revised lower for this year:

  • 2024: 0.6% (decline from 0.8% in December)
  • 2025: 1.5% (unchanged)
  • 2026: 1.6% (upward revision from 1.5%)

The headline inflation outlook saw some downward revisions:

  • 2024: 2.3% (decrease from 2.7% in December)
  • 2025: 2.0% (decrease from 2.1%)
  • 2026: 1.9% (unchanged)

Euro area economic activity stagnated in 2023, and recent industrial production numbers from Germany indicate a significant threat of entrenched weakness from the region’s largest economy. However, for the rest of the Euro area, recent surveys point to a gradual cyclical recovery, suggesting that Europe should at least avoid recession in 2024.

Downward revisions to the inflation forecasts likely reflect the weaker growth profile. The ECB sees inflation falling to target next year and then undershooting the 2% target in 2026, begging the question…why not cut rates today? While underlying inflation is showing a general moderation, the ECB believes the data is not “durable” enough to give them sufficient confidence, largely due to the stickiness of wage inflation. On this point, Lagarde noted that there are tentative signs that wage growth is beginning to moderate, but they need additional evidence.

Policy outlook

The latest staff forecasts lay the foundations for a first ECB rate cut. Still, further evidence of fading price pressures, particularly from the wage side, is required before it feels sufficiently confident to introduce monetary relief.

As such, the ECB is likely to start cutting rates in June—the same month that we believe the U.S. Federal Reserve will begin easing policy. However, with Euro area growth drastically undershooting U.S. growth and inflation forecasted to fall slightly below target within the next two years, once the ECB finally starts policy easing, it is likely to cut with greater urgency and for a more extended period of time than the Fed.

Macro views

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