FRANKFURT – Policymakers at the European Central Bank are widely expected to keep interest rates at their current levels for a third consecutive time as the head of the bank faces damning criticism from within.
It remains almost a given that the next change in Eurozone interest rates will be a cut, but the timing is far from clear. ECB President Christine Lagarde and Chief Economist Philip Lane have suggested the public lender could wait until June to first begin lowering borrowing costs, but varying statements from other members of the bank’s decision-making body, the governing council, have signalled that reductions could come earlier than the summer or not until 2025.
Investors are currently expecting around six cuts this year, with the first downward move in April just less than an even money bet, according to Tuesday’s market data. And while the ECB’s raison d'être is price stability, it is also tasked with implementing policies that support growth as long as they do not impede bringing inflation in line with the bank’s target of 2% over the medium term. The rate of consumer price spiked last month, but the increase was widely expected, with the ECB correctly warning about such an eventuality. More importantly, the core rate fell in December, and the most recent bank projections unveiled at last month’s meeting plot headline inflation easing this year to an average of 2.7% and then falling to 2.1% and 1.9% in 2025 and ’26, respectively.
With inflation apparently in retrograde, sputtering business activity looms large for policymakers of both the monetary and political ilk. Purchasing managers’ indices for the Eurozone and its biggest economy – Germany – remain in contraction territory below the 50-point mark, with more of the same expected for the initial January report due Wednesday, which coincidently marks the start of the governing council’s two-day rate decision meeting.
Looking back at 2023, growth in the Eurozone was flat in the first quarter, eked out 0.2% in the second, and contracted 0.1% in the third. Add to that ongoing weakness likely to be confirmed by sub-50 PMIs, and monetary policy doves should feel emboldened. But remaining concerns about possible inflation spikes from further geopolitical flare ups are expected to keep the ECB from going lower earlier: few had “Houthi drone-bomb ships” on their Black Swan bingo cards.
It’s personal, say personnel
So, with the bank all but locked in to hold mode, attention could turn to apparent dissention among the ranks at the ECB. A poll released just days before the governing council was to convene served up a figurative but still painful smack in the face for bank suprema Lagarde, with half of the staff respondents to a survey saying she is doing a “poor” or “very poor” job and even more noting that she was not the right person to run the bank.
The poll by the labour union International and European Public Services Organisation covered its members working at the bank and was taken to mark the halfway point of Lagarde’s eight-year term. While the ECB has pushed back on the results, it should be noted that Lagarde’s predecessors scored much better at this juncture in their tenures.
While only around 1,100 of the bank’s 4,500-strong workforce responded to the survey, those who did participate criticised Lagarde for damaging the bank’s reputation, with some suggesting her penchant for discussing politics has brought disrepute on the institution. And while industry observers won’t come and say it – at least not on record – many perceive her as out of her depth.
Lagarde, a lawyer by training, should have the opportunity to address the stinging poll results at the press conference on Thursday. That is whether she wants to or not.
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- Policymakers dash hopes of early rate cuts
- Internal poll shows stark criticism of ECB president
- Rate decision due Thursday at 13:15 GMT / 14:15 CET
- Press conference set for 13:45 GMT / 14:45 CET
By Eric Culp
European Editor, LiveSquawk News
@EricCulpLS
23 January 2024 | 10:30 GMT
FRANKFURT – Policymakers at the European Central Bank are widely expected to keep interest rates at their current levels for a third consecutive time as the head of the bank faces damning criticism from within.
It remains almost a given that the next change in Eurozone interest rates will be a cut, but the timing is far from clear. ECB President Christine Lagarde and Chief Economist Philip Lane have suggested the public lender could wait until June to first begin lowering borrowing costs, but varying statements from other members of the bank’s decision-making body, the governing council, have signalled that reductions could come earlier than the summer or not until 2025.
Investors are currently expecting around six cuts this year, with the first downward move in April just less than an even money bet, according to Tuesday’s market data. And while the ECB’s raison d'être is price stability, it is also tasked with implementing policies that support growth as long as they do not impede bringing inflation in line with the bank’s target of 2% over the medium term. The rate of consumer price spiked last month, but the increase was widely expected, with the ECB correctly warning about such an eventuality. More importantly, the core rate fell in December, and the most recent bank projections unveiled at last month’s meeting plot headline inflation easing this year to an average of 2.7% and then falling to 2.1% and 1.9% in 2025 and ’26, respectively.
With inflation apparently in retrograde, sputtering business activity looms large for policymakers of both the monetary and political ilk. Purchasing managers’ indices for the Eurozone and its biggest economy – Germany – remain in contraction territory below the 50-point mark, with more of the same expected for the initial January report due Wednesday, which coincidently marks the start of the governing council’s two-day rate decision meeting.
Looking back at 2023, growth in the Eurozone was flat in the first quarter, eked out 0.2% in the second, and contracted 0.1% in the third. Add to that ongoing weakness likely to be confirmed by sub-50 PMIs, and monetary policy doves should feel emboldened. But remaining concerns about possible inflation spikes from further geopolitical flare ups are expected to keep the ECB from going lower earlier: few had “Houthi drone-bomb ships” on their Black Swan bingo cards.
It’s personal, say personnel
So, with the bank all but locked in to hold mode, attention could turn to apparent dissention among the ranks at the ECB. A poll released just days before the governing council was to convene served up a figurative but still painful smack in the face for bank suprema Lagarde, with half of the staff respondents to a survey saying she is doing a “poor” or “very poor” job and even more noting that she was not the right person to run the bank.
The poll by the labour union International and European Public Services Organisation covered its members working at the bank and was taken to mark the halfway point of Lagarde’s eight-year term. While the ECB has pushed back on the results, it should be noted that Lagarde’s predecessors scored much better at this juncture in their tenures.
While only around 1,100 of the bank’s 4,500-strong workforce responded to the survey, those who did participate criticised Lagarde for damaging the bank’s reputation, with some suggesting her penchant for discussing politics has brought disrepute on the institution. And while industry observers won’t come and say it – at least not on record – many perceive her as out of her depth.
Lagarde, a lawyer by training, should have the opportunity to address the stinging poll results at the press conference on Thursday. That is whether she wants to or not.