MMost people are not yet expecting a rate move: However, it may be interesting when the European Central Bank Council, the euro zone's top monetary policy body, meets on Thursday for its March interest rate meeting. The inflation rate in the euro area has decreased significantly, recently reaching 2.6 percent. If developments continue in this manner, the European Central Bank's 2% target no longer seems far away. However, inflation remains strong, especially in services, and core inflation, i.e. inflation excluding energy and food, which central bankers like to view as an indicator of longer-term developments, also remains high.
Deutsche Bank expects to hold the session
Therefore, ECB President Christine Lagarde's words on Thursday will be examined very carefully to see if they reveal anything about the date of the first interest rate cut. “The ECB will continue its difficult path between Scylla and Charybdis for the time being,” Robin Winkler, Deutsche Bank’s new chief German economist, told FAZ. On the one hand, the high level of interest rates threatens to bring about growth in Europe. The Eurozone is at a complete standstill. It is clear that weak industrial production is already affecting lower energy prices. On the other hand, core inflation remains above 3%, Winkler said: “This is primarily due to continued high wage growth in the euro area – a topic that ECB President Lagarde is likely to emphasize again at the press conference.” .
Michael Holstein, chief economist at DZ Bank, said he did not expect a clear signal from the ECB towards a rate cut on Thursday: “But the ECB will not take summer off the table as the start of the interest rate cutting cycle.” ECB President Lagarde is likely to emphasize “data-drivenness” in the rest of the session.
New inflation expectations are likely to be a sticking point. The ECB last updated its forecasts in December, and since then inflation has been somewhat weaker than expected. “In December, the ECB forecast inflation rates of 2.8 and 2.9 percent for the fourth quarter of 2023 and the first quarter of 2024,” said Carsten Junius, economist at JSafra Sarasin Bank. “The result for the fourth quarter of 2023 is 2.74 percent, and for the first quarter of 2024 it is likely to be around 2.65 percent.”
What will happen to the ECB's forecasts for 2026?
This would indicate a slight downward revision to inflation expectations. What is not important is whether and to what extent the central bank will lower its forecasts for the next few years. “The sharp decline in electricity and gas prices since December is likely to lead to a downward revision in the inflation rate over the entire forecast horizon,” said Frederic Ducrozet, economist at Pictet Bank. As the ECB pays attention to the evolution of inflation in the medium term, core inflation forecasts for 2026 should receive special attention, says Ducrozet: “If it is reduced to 2 percent, as we expect, the ECB will be in a better position.” . “The path to lower interest rates during this period is in our June base case scenario.”
Recently, a majority of the ECB's Governing Council appeared to be rallying behind June as the date for the first interest rate cut. While German Bundesbank President Joachim Nagel urged caution, Portuguese council member Mario Centeno indicated that interest rate cuts should at least be discussed at the next ECB meeting. However, Austrian Central Bank President Robert Holzmann suggested waiting for the US central bank to make its first interest rate hike. Now the debate over the first rate cut is likely to become “more heated,” predicts economist Carsten Brzeski at ING. He expects “subtle changes” in ECB communications that could pave the way for interest rate cuts in June.
“Recent comments from ECB Council members clearly show that, in their view, it is time to cut interest rates,” said Marco Wagner, economist at Commerzbank. Dovish advocates of loose monetary policy on the ECB Council would prefer to achieve this sooner rather than later, but hawks, more hawkish monetary policy, have tried to slow it down a bit, Wagner said: “The reality is that the data is comprehensive for that.” The first quarter on wages, profits and profit margins for the euro area as a whole will not be available before the June meeting.”
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