Five Questions for the European Central Bank That Need Answers Now

The European Central Bank is scheduled to convene on Thursday, and investors are closely watching for any indications of a potential decrease in interest rates due to the decline in inflation.

The European Central Bank, anticipated to maintain rates at an all-time high of 4%, is maneuvering through a challenging situation of balancing the need to keep rates elevated to control inflation and avoiding delaying any rate cuts as inflationary pressures diminish rapidly.

Morgan Stanley’s chief European economist, Jens Eisenschmidt, stated that despite varying opinions on the timing, ECB speakers have all recognized the inevitability of rate cuts. The upcoming meeting presents a chance to modify the statement to convey this message. 

Is It Possible for the ECB to Alter Its Communication?

The ECB has resisted discussions about reducing rates, leading to a decrease in market expectations from 150 bps to 90 bps for cuts this year.

Nevertheless, a potential relaxation is likely, and traders are seeking direction regarding when the initial action may occur.

The head of Slovakia’s central bank, Peter Kazimir, mentioned that the ECB will recognize a better inflation forecast on Thursday but should refrain from making any promises about cutting rates at this point.

“The pricing in the market for rate cuts has shifted to a more rational stance, reducing the necessity for resistance,” stated Salomon Fiedler, a European economist at Berenberg. He also mentioned that Christine Lagarde, the head of the ECB, is expected to emphasize the importance of being dependent on data.”

How Come Wages Are Such a Big Deal Now?

The ECB has identified salaries as the primary factor that will influence its ability to lower interest rates.

Wage increase negotiations decelerated to 4.46% in the fourth quarter from 4.69% in the preceding quarter, marking the peak since 2005.

The forward-thinking Indeed wage tracker reached its peak in late 2022 but remained at 3.9% in January, exceeding the ECB’s 3% cutoff for the 2% inflation target.

The ECB’s essential initial wage information for the first quarter is scheduled to be released in May. Therefore, June will mark the first opportunity for policymakers to observe sufficient indications of a decrease in wage growth.

What Will the Most Recent Forecasts From the European Central Bank Reveal?

Experts anticipate adjustments to the 2024 predictions for economic growth and inflation.

Growth in the Euro area has remained stagnant for the sixth consecutive quarter, and the European Commission recently revised its GDP growth projection for this year to 0.8% from 1.2%.

Information released on Friday indicated that inflation in the bloc decreased to 2.6% in February from 2.8% in the previous month.

“The ECB’s prediction for headline inflation is expected to decrease due to energy prices being approximately 20% lower than they were during the December macro predictions,” observed Andrzej Szczepaniak, senior European economist at Nomura. 

Is There a Possibility That the European Central Bank Will Reduce Interest Rates Too Late?

Certainly, postponing interest rate reductions increases the likelihood of taking more forceful action in the future if inflation decreases more rapidly than expected.

Francois Villeroy de Galhau, the leader of the Bank of France, suggests that incremental and practical steps might be better than waiting too long and then making drastic changes.

There is also an argument for taking your time. Lagarde emphasized the importance of the ECB refraining from lowering rates prematurely, as this could extend periods of elevated inflation.

According to Yannis Stournaras from Greece, the most suitable moment could be the conclusion of the first half.

“If the communication is originating from a Greek central banker, it’s likely a strong signal that actions will be taken in June rather than earlier,” stated Gareth Hill, a portfolio manager at Royal London Asset Management.

Does It Make a Difference if the European Central Bank (ECB) Cuts Before the Federal Reserve?

Not quite. The economy in the eurozone is less robust than that of the United States, which suggests a more compelling argument for implementing monetary stimulus measures.

Historical patterns indicate that the ECB typically adjusts its rates following the Federal Reserve. As a result, the timing of their actions is crucial, especially in light of the possibility of an early rate cut by the ECB.

According to LSEG data, traders believe there is a good chance that the ECB and Fed will start lowering interest rates in June, with the ECB having a slightly higher chance.

“There is no solid economic rationale to suggest that the ECB cannot move until the Fed does,” stated Rohan Khanna, the head of euro rates strategy at Barclays.