Christine Lagarde is expected to reveal little at the European Central Bank's next monetary policy meeting in Frankfurt on Thursday, meaning markets will be left searching for subtle signs of the bank's intentions as investors increasingly price in cuts for June.
The bank will almost certainly keep interest rates unchanged at 4%, having held them at record levels since October following a series of 10 consecutive increases in 2023, as it presses ahead in its battle to lower euro zone inflation.
Instead, it will leave financial markets searching for subtle signs of the ECB's intentions, as investors increasingly reckon with the prospect of the bank making its first interest rate cuts in June.
As of now, the ECB is opposing any talk of cutting interest rates, sticking to its assurances that it will only start making cuts when data clearly show that inflation has started to fall to target levels of 2% across the eurozone.
New data published on Friday saw markets retreat from their expectations of any imminent interest rate cuts from the European Central Bank, as investors saw the current data as failing to support the prospect of cuts at the bank's April meeting.
Worse-than-expected figures from the European Union's official data provider Eurostat showed the euro zone saw higher-than-expected inflation of 2.6% in February – down from 2.8% in January and from a peak of 10.6% in October 2022.
From a financial markets perspective, this leaves the ECB meeting in June as the closest opportunity to cut interest rates, as the bank does not have a meeting scheduled for May.
A Reuters poll of 73 economists showed that two-thirds of forecasters believe the European Central Bank will make a 25 basis point cut in June that will bring interest rates down to 3.75%. Markets expect cuts of 90 basis points in 2024, compared to 150 basis points expected at the beginning of the year.
However, the ECB is unlikely to make any clear commitments on any possibility of June cuts, meaning investors will be left looking for subtle signals of the bank's intentions in Lagarde's communications at the press conference following the governing body meeting.
Analysts at RBC Capital Markets led by Peter Shavrik said they “expect the ECB to retain discretion with Lagarde likely to reiterate the ECB's reliance on data, and its particular focus on incoming information on wage growth.”
However, ING analysts led by Carsten Brzeski noted that the ECB may be giving subtle signals in its communications that it is open to the possibility of cuts that would pave the way for an interest rate cut in June.
“Over recent months, the ECB’s communication on interest rate cuts has gradually changed from ‘we haven’t even cut rates’ to ‘it is too early to discuss rate cuts’ in January,” ING analysts said. Members “had a first discussion on the preconditions for lowering interest rates” or “we decided to start this discussion at the next meeting”, this would represent a further shift in the direction of policy easing.
New staff forecasts from within the ECB could also support the possibility of interest rate cuts if they present any signs that inflation could fall to 2% before the third quarter of 2024.
Analysts expect that bank staff expectations will likely see cuts in key growth numbers in the near term.
ING analysts said: “Any downward adjustment to the growth profile and any signs that inflation may reach 2% before the third quarter of next year will open the door to early interest rate cuts.”
