The monetary policy meeting that the European Central Bank (ECB) is set to hold this Thursday does not seem to bring any news in terms of measures that the organization can take on this matter. The ECB has set the stage well for everyone, investors and analysts, to assume that it will cut interest rates in June, and it would not be a surprise if this turns out to be true. What the market wants to know is what will happen after June, and this will become clearer after learning how the organization updated its macroeconomic forecast table on this matter, and after listening to a message from Christine Lagarde, President of the ECB, at this meeting in Thursday.
Investors and analysts will have to resolve a number of issues. Will the ECB continue to cut rates aggressively? Will you leave them stable for a long time to see how the economic situation develops? Will you be able to back down if inflation rises again? Given these issues, the press conference that Lagarde, the ECB President, will give is particularly important on this occasion. We shouldn’t forget this The official discourse of the organization is itself considered an instrument of monetary policy.as it moves markets and therefore eurozone financial conditions.
“The focus will be on trying to gauge the pace of rate cuts starting in June,” explains Germán García Mellado, A&G’s bond manager, a sentiment repeated time and time again among analysts. “Investor attention will be focused on what comes next,” agrees Frank Dixmier, global CIO of fixed income at Allianz GI. “In Europe, the ECB has practically promised to cut rates this week. “The focus will therefore be on clues to future forecasts,” confirms Stephen Bell, Columbia Threadneedle’s chief EMEA economist, which we will try to decipher following Lagarde’s rhetoric.
Uncertain macroeconomic situation
The ECB’s dilemma is not easy to resolve, especially given that the eurozone economy is at a crossroads and it is not at all clear how it will develop in the coming months. Yes, inflation has dropped significantly from its highs, but it is still falling short of the central bank’s target of 2% and there are some worrying signs on that front, especially on wages. This is currently one of the most important variables for the ECB because of the impact it can have on inflation, as well as the potential for creating a spiral of rising prices and wages that is very difficult to escape.
Expecting wage growth to slow after the initial impact that inflation has had on wage growth, and to see whether the eurozone economy picks up or slows down in the coming months, the ECB has avoided tightening its fingers and committing to further rate cuts after June. The change in market expectations for rate cuts in recent months demonstrates the high degree of uncertainty that currently exists: If at the beginning of the year eight rate cuts were expected by 2024, now markets assume that there will be only two. As for the market-tracked meeting calendar of April 2025, two other rate cuts are being left out, 25 basis points each, after the initial cut they are forecasting for this Thursday.
Given the current situation, the update of the macroeconomic forecast table, which the ECB is going to present, is of particular importance this week. If inflation forecasts are revised upward, markets will react by lowering expectations for rate cuts in the coming months, and if, on the contrary, these estimates are revised downward, then we can expect a more aggressive rate cut scenario.
If there is no change, says Pedro del Pozo, director of financial investments at Mutualidad, it is likely that we will see “at least one more rate cut this year, but we should expect the ECB’s policy to be more data-driven, more data-sensitive on inflation, is more attentive to growth data, as well as to wages in connection with the next ECB meetings. This implies, therefore, a slight reduction in expectations regarding the upcoming rate cut. months, in the sense that they are not as progressive,” he explains.
The macro picture currently in effect, presented at the March meeting, includes inflation forecasts of 2.3% in 2024, 2% in 2025 and 1.9% in 2026, with real GDP growth (excluding inflation) at 0 .6%, 1.5% and 1.6% respectively for the same years.
At all, We can expect Lagarde to try to avoid falling into the trap and commit to a specific rate cut schedule for the future. “We rule out the ECB offering firm guidance at this week’s meeting, but new updated forecasts will determine whether recent data volatility has led to any significant changes to the ECB’s monetary policy outlook,” explains analyst Annalisa Piazza at Investments with a fixed income.” MFS Investment Management.