No shocks or surprises. The European Central Bank has kept interest rates unchanged and has already set its sights on the first cut, which could occur in the summer of 2024 (according to the statements of the institution’s president, Christine Lagarde), amid an intense fall in interest rates. inflation growth rates. The Frankfurt-based monetary institution kept its three benchmark interest rates unchanged at its December meeting. This is the third ECB meeting in which the ECB has taken no action since the rate hike cycle began in July 2022. Since then, the ECB has raised the price of money at 10 consecutive meetings. Now there are three in which he doesn’t move. When will the next step be? It was Lagarde’s press conference, question after question.
After this stop, the deposit rate (where commercial banks accumulate their reserves) remains at 4%, the refinance rate is repeated at 4.5%, the highest since 2001, and the marginal lending rate remains at 4.75%. Now attention and bets are on the first rate cut, which could happen in the summer, as Christine Lagarde, the institution’s president, said a few weeks ago.
The ECB’s decision came after The eurozone’s interannual inflation rate stood at 2.9% in December., which is half a percentage point higher than the price increase recorded in the previous month and is the highest since October. By excluding the impact of energy, food, alcohol and tobacco from the calculation, the base rate fell by two tenths to 3.4%.
Unsurprisingly, the ECB kept its deposit rate at 4%: the decision was expected by all economists polled by Reuters and was fully priced in by markets. Also, as expected, the key lines of the interest rate press release remain unchanged. Once again emphasizes that interest rates should remain at the current level for a “sufficiently long period” and that monetary policy will continue to be contractionary “as long as necessary.” And while it no longer said that “domestic price pressures remain high”, it now said that “the information received broadly confirmed the (ECB’s) previous assessment of the medium-term inflation outlook,” it comments. Jack Allen-Reynolds of Capital Economics.
Wages and the labor market prevent core inflation from falling more rapidly. The evolution of wages has been the subject of debate in economic circles and at the ECB at recent meetings. This time it will be the same because Wage inflation is the stickiest. With wages still high, disappointment for the market was almost guaranteed. Investors expect rates to start falling as early as the April meeting.
Lagarde noted at a press conference after the meeting that “one of the consensuses reached (within the ECB Governing Council) is that we will depend on (economic) data… we are particularly attentive to supply bottlenecks“, said Christine Lagarde in response to the press conference.
In addition, he acknowledges that there are important risks, including geopolitical ones, that are hampering maritime transport: “Delivery times are delayed, costs and freight rates are rising, but there is more capacity today and this will mitigate the impact. But, despite everything, we are careful and We pay close attention to what is happening with the conflict in the Middle East region.“This is an additional risk, a disruption of maritime transport,” the ECB President also said.
Lagarde also said the central bank is keeping a particularly close eye on labor costs and profits: “Our scenario is that The increase in wages will be absorbed when analyzed through labor costs per unit of output. and profit margin (the cost of producing each unit and its selling price).” In any case, the ECB president lamented that “it is very difficult to foresee what will happen.”
Three factors that can stop the decline
However, inside the central bank they do not like the fact that the market generates expectations that do not correspond to the reality they perceive, so Lagarde did not want to answer a question from a journalist who wanted to know whether April could be the date chosen for cutting rates or starting conversations about a possible reduction. The French banker replied that we are still in the first quarter and that it is premature to talk about cuts.
In addition, CMC Markets highlights three issues that could make it difficult for the ECB to achieve its inflation target of 2% growth and lead to the institution try to curb expectations of aggressive rate cuts at today’s meeting what supports the market. The first point is “the effect of the second round of wage increases.”one of the main sources of inflationary pressure, which can cause inflation to strengthen and enter a self-feeding spiral.
Second, they highlight “increased transport costs due to route diversions due to the Red Sea conflict,” a geopolitical factor that has driven up freight prices in recent weeks.
In this regard, Lagarde explained that “delivery times are delayed, costs and freight rates are rising, but today there is more capacity, and this mitigates the impact. But, despite everything, we are careful and We pay close attention to what is happening with the conflict in the Middle East region.“This is an additional risk, a disruption of maritime transport,” the ECB President also said.
Third point What stands out is “structural trend towards deglobalization and protectionism,” a process that can increase the prices of goods in the market, thereby contributing to increased inflationary pressures.
However, the ECB could stick to what is known as a “wait and see” regime for a longer period. If core inflation continues to show no signs of falling further in the coming months, interest rate cuts may be delayed.
What analysts say
“At today’s press conference, unlike in December, the ECB President said stabilization of wage growth for the first time. In this sense, a small step has been taken to lower interest rates. Otherwise, the Board of Governors maintained the view that it was premature to discuss rate cuts. We still expect the first rate cut to come only in June, followed by two more cuts of 25 basis points each in the second half of the year,” estimates Jörg Cramer from Commerzbank.
“The ECB’s continued caution in cutting interest rates is appropriate. This is because the main driver of domestic costs, wages, is rising much faster than is consistent with the ECB’s inflation target. “Collectively agreed wage growth in the euro area has accelerated to almost 5% and wage pressure is likely to remain high,” the German economist adds.
For Pimco, one of the largest fixed-income investors on the planet, the takeaway from the meeting is that “risk remains tilted toward later easing of monetary policy“And less aggressive than what markets expect this year,” says Konstantin Veit, fund manager. “The key factors to watch are financial conditions, fiscal positioning, profit margins and labor cost trends, with there is a particular focus on wage growth,” says Veit.
“Today’s meeting once again emphasized that the ECB is not in a position to start cutting rates in the near future. In any case, even if real growth continues to be weaker than the ECB expected each quarter, as long as the eurozone remains in stagnation de facto and avoid falling into a more severe recession“And as long as the ECB continues to forecast a return to potential growth rates in one or two quarters, there is no reason for the ECB to respond to the slowdown with an imminent rate cut,” says Carsten Brzeski of ING.
“When asked whether she would repeat her statement last week in Davos about the likelihood of rate cuts before the summer, Lagarde said she had always stood by what she said. Although today we learned that we should not pay too much attention to each issue. The combination of these two comments would mean that the first rate cut cannot happen in June, but only in July. soon. However, past experience has shown that The ECB President is not necessarily the best ECB forecaster“adds the Dutch bank analyst.