FRANKFURT – The European Central Bank left its main interest rates unchanged Thursday as expected, but the staff’s lower inflation and growth forecasts had some observers wondering what is delaying lower rates.
A lack of confidence in the future path of inflation, which the lender said is likely to remain in decline, seems to be the problem, according to ECB President Christine Lagarde.
“We clearly need more evidence, more data,” she told journalists at the press conference following the announcement of the decision. “We will know a little more in April, but a lot more in June.”
This stance has likely spurred any laggard analysts still considering a move next month into focussing on the summer for the bank’s first move in an expected cycle of rate cuts.
ECB inflation expectations from March (blue) and December.
The numbers seem to suggest the time has come. The ECB reduced its expectations for this year’s headline annual inflation in the Eurozone to 2.3% from the 2.7% estimate in December, with next year’s forecast lowered one-tenth to 2.0% – the bank’s medium-term target. It said the 2026 prediction was unchanged at 1.9%.
At the same time, the staff cut this year’s projection for core consumer price growth to 2.6% from December’s 2.7%, it reduced the estimate for next year to 2.1% from 2.3%, and it downwardly revised the 2026 forecast to 2.0% from 2.1%.
The bank also stepped-down its GDP growth forecast for this year to 0.6% from the 0.8% estimate in December. Expectations for next year were unchanged at 1.5%, with the 2026 estimate raised a tenth to 1.6%, the ECB said. In fact, when Lagarde’s opening statement reached the section on Eurozone business activity, the first sentence was, “The economy remains weak.”
What’s your writ?
While the public lender’s priority is to corral inflation, it can take steps to boost growth that don’t undermine its primary mission. In her opening statement, Lagarde warned: “Inflation may surprise on the downside if monetary policy dampens demand more than expected.”
But looser policy was off the table this month. “We have not discussed rate cuts for this meeting,” she noted. “We have just begun discussing dialling back our restrictive stance.”
Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, tweeted: “ECB on hold, staff projections revised lower as expected, including core back to 2% by 2026. Broken record but a forward-leading central bank with a tight policy stance, forecasting inflation back at target in 2025, should cut rates now as real rates move higher.”
The euro lost ground against the greenback following the announcement of no changes to monetary policy, perhaps because the unexpectedly large reduction in headline inflation forecasts spurred hopes for rate cuts sooner rather than later. But, alas, Lagarde drove a stake through such optimism by noting that officials need more data, which pushed the currency pair back above 1.09 and into territory from Europe’s morning session.
Once all was said and done, including the press conference, traders on the overnight index swaps market were betting on total cuts of around 96 basis points this year, which was up from nearly 91bp on Tuesday.
TD Securities wrote: “While data between now and June could move the dial, we think the only real take-away from today's decision and press conference was to reinforce an intended first June cut.”
Even with falling inflation and growth expectations, the bank remains cautious. Lagarde noted that domestic price pressures remain high, mainly due to wages. Ironically, while she was speaking at the bank’s headquarters in Frankfurt, some air and train travellers in the German financial centre town were surely cussing out striking unions that had thrown spanners into their travel plans, with a railroad labour group walking out in hopes of securing a 35-hour week.
She also noted that the expected fall in inflation this year will likely be due to declines in energy prices, and that economic growth is expected to rebound in the second half. These seemed to be offered as yet more reasons why the ECB can afford to wait on its first rate cuts. Plus, more inflation data is coming, she explained.
Fresh reports on price growth for March, April, and May will be added to staff calculations for the June meeting, which may help officials pull the trigger.
The rate-cut bullet, it appears, has already been chambered: “I’m not here saying that we will wait until we are at 2%,” Lagarde said.
“We will do what we have to do when we have to do it.”
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- Rates likely to remain unchanged until at least June
- Bank cuts inflation expectations
- Staff lowers 2024 growth projection
- EUR/USD whipsaws before again exceeding 1.09
By Eric Culp
European Editor, LiveSquawk News
@EricCulpLS
7 March 2024 | 15:40 GMT
FRANKFURT – The European Central Bank left its main interest rates unchanged Thursday as expected, but the staff’s lower inflation and growth forecasts had some observers wondering what is delaying lower rates.
A lack of confidence in the future path of inflation, which the lender said is likely to remain in decline, seems to be the problem, according to ECB President Christine Lagarde.
“We clearly need more evidence, more data,” she told journalists at the press conference following the announcement of the decision. “We will know a little more in April, but a lot more in June.”
This stance has likely spurred any laggard analysts still considering a move next month into focussing on the summer for the bank’s first move in an expected cycle of rate cuts.
The numbers seem to suggest the time has come. The ECB reduced its expectations for this year’s headline annual inflation in the Eurozone to 2.3% from the 2.7% estimate in December, with next year’s forecast lowered one-tenth to 2.0% – the bank’s medium-term target. It said the 2026 prediction was unchanged at 1.9%.
At the same time, the staff cut this year’s projection for core consumer price growth to 2.6% from December’s 2.7%, it reduced the estimate for next year to 2.1% from 2.3%, and it downwardly revised the 2026 forecast to 2.0% from 2.1%.
The bank also stepped-down its GDP growth forecast for this year to 0.6% from the 0.8% estimate in December. Expectations for next year were unchanged at 1.5%, with the 2026 estimate raised a tenth to 1.6%, the ECB said. In fact, when Lagarde’s opening statement reached the section on Eurozone business activity, the first sentence was, “The economy remains weak.”
What’s your writ?
While the public lender’s priority is to corral inflation, it can take steps to boost growth that don’t undermine its primary mission. In her opening statement, Lagarde warned: “Inflation may surprise on the downside if monetary policy dampens demand more than expected.”
But looser policy was off the table this month. “We have not discussed rate cuts for this meeting,” she noted. “We have just begun discussing dialling back our restrictive stance.”
Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, tweeted: “ECB on hold, staff projections revised lower as expected, including core back to 2% by 2026. Broken record but a forward-leading central bank with a tight policy stance, forecasting inflation back at target in 2025, should cut rates now as real rates move higher.”
The euro lost ground against the greenback following the announcement of no changes to monetary policy, perhaps because the unexpectedly large reduction in headline inflation forecasts spurred hopes for rate cuts sooner rather than later. But, alas, Lagarde drove a stake through such optimism by noting that officials need more data, which pushed the currency pair back above 1.09 and into territory from Europe’s morning session.
Once all was said and done, including the press conference, traders on the overnight index swaps market were betting on total cuts of around 96 basis points this year, which was up from nearly 91bp on Tuesday.
TD Securities wrote: “While data between now and June could move the dial, we think the only real take-away from today's decision and press conference was to reinforce an intended first June cut.”
Even with falling inflation and growth expectations, the bank remains cautious. Lagarde noted that domestic price pressures remain high, mainly due to wages. Ironically, while she was speaking at the bank’s headquarters in Frankfurt, some air and train travellers in the German financial centre town were surely cussing out striking unions that had thrown spanners into their travel plans, with a railroad labour group walking out in hopes of securing a 35-hour week.
She also noted that the expected fall in inflation this year will likely be due to declines in energy prices, and that economic growth is expected to rebound in the second half. These seemed to be offered as yet more reasons why the ECB can afford to wait on its first rate cuts. Plus, more inflation data is coming, she explained.
Fresh reports on price growth for March, April, and May will be added to staff calculations for the June meeting, which may help officials pull the trigger.
The rate-cut bullet, it appears, has already been chambered: “I’m not here saying that we will wait until we are at 2%,” Lagarde said.
“We will do what we have to do when we have to do it.”