The markets are getting set up for a fairly predictable outcome for the ECB meeting. The most recent comments from members of the monetary policy-setting committee have largely reflected market expectations. Which means that if the ECB does something different than last time, it could shake up the markets.
The prevailing narrative is that the shared central bank will start its easing cycle in June, with ECB rate cuts expected to be on the agenda. This is bolstered by particular comments from ECB President Christine Lagarde that are being interpreted as essentially telling the market when the cut will happen. She has said, repeatedly, that the data from Q1 will be “very important” to determine when to cut rates. That data will be coming out through the course of this month and the early part of May. Which means that the ECB will have the information it needs to decide to cut at the June meeting.
It Can’t Happen Soon Enough
In the meantime, however, the data has been piling up to show it’s time to start easing. On top of the Euro Zone economy essentially stagnating so far, inflation has been coming down faster than expected. Initial projections from the ECB said that CPI wouldn’t be down to the 2.0% target until next year. Now economists believe that could happen as soon as in the third quarter.
We have to remember that for years, the ECB has been fighting the opposite problem. It kept rates below zero for over a decade as it fought low inflation in a low growth economy. Europe saw a large bump in consumer prices last year as a result of the war in Ukraine and the after effects of the pandemic spending. But Europe did not spend nearly as much as the US or UK in the pandemic period, meaning that its inflationary pressure should be less.
The Base Effect and Future Easing
What that means is that the price changes that drove up the annual inflation rate are fast rolling off the 12-month calculator. This is called “base effect”, as annual inflation compares prices to one year ago. If prices remain growing at their current rate, then inflation could not only come down to the ECB’s target, but go below it.
Economic growth is generally needed to generate organic inflation. With the EU coming back to pressure governments to keep a lid on their deficit spending, the velocity of money in the shared economy is slowing down. Which means that the ECB could find itself in need of cutting much quicker than its other counterparts in order to shore up its inflation targets.
What to Look Out For
That is likely to be well into the future, however. But it could have an impact on the thinking of the ECB members as they gather for their April rate decision. The question is if Lagarde, or the statement itself, will provide a more solid signal than what has already been delivered about the June cut. Or maybe even hint at the possibility of easing in May, as it’s generally expected that the central bank will try to provide some guidance ahead of actually starting to ease.
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- Source: https://www.orbex.com/blog/en/2024/04/ecb-rate-decision-signals-when-the-cut-is-coming
