Growth concerns cloud ECB’s move to normalise policy
The European Central Bank (ECB) is expected to take another significant step in normalizing its monetary policy stance at its upcoming March 7th meeting.
March Meeting to Mark Shift Towards Neutral Policy
While recent economic data has been relatively resilient, concerns about growth and the inflation outlook persist, leaving the timing and pace of potential rate cuts still uncertain.
At next week's gathering, the European Central Bank (ECB) is poised to move from its current restrictive policy stance towards a more neutral position. The new staff projections are anticipated to revise down growth forecasts for 2024 but leave the 2025 and 2026 outlooks broadly unchanged. Critically, inflation for 2025 is projected to be revised down to the 2% target.
Rate Cut Timing Hinges on Wage and Inflation Developments
While the new projections may not definitively rule out rate cuts at a particular meeting, market consensus remains that the first 25 basis point reduction will occur at the June meeting rather than April. Recent economic data has not been judged weak enough yet to bring forward easier policy.
The ECB has repeatedly stated it wants to ensure inflation returns sustainably to the 2% target over the medium term before cutting rates. As such, the path of wage growth will be closely monitored given its pivotal role in the inflation outlook.
Market Repricing but Muted Reaction Expected
Throughout February, markets repriced policy easing expectations significantly. They now anticipate around 87 basis points (bps) of ECB rate cuts for 2024, with 82bps coming in the second half of the year after an initial 25bps move in June. This repricing brings market expectations more in line with the ECB's own outlook.
Despite the recent adjustment in rate forecasts, a muted market reaction is anticipated following next week's meeting, as current pricing is seen as relatively well-aligned with ECB communications.
Better macro data helps to calm nerves
Recent macro data has afforded the ECB some breathing room ahead of kicking off rate cuts. While economic growth is stagnating, the region is not facing an outright contraction. Moreover, inflation expectations remain anchored and employment increased during Q4 2023.
The ECB will be weighing these resilient factors against persistent underlying inflationary pressures stemming from the tight labour market and the uncertainty around how wage gains will ultimately pass through to consumer prices.
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