After the quarterlies, it’s time for the European Central Bank…
(Boursier.com) — After the quarterlies, place at the European Central Bank. The Institution’s next monetary policy decision is scheduled for early Thursday afternoon. Konstantin VEIT, portfolio manager at PIMCO, believes “the ECB will keep its key rates unchanged and will once again emphasize that it is data dependent.” According to the specialist, “the Governing Council will probably want to be further along in the disinflation process before being sufficiently confident that inflation will sustainably reach the target in due time. Since the end of 2023, the markets have significantly reduced their expectations in terms of rate cuts, emphasizes the expert. Therefore, the projections seem much more reasonable and are not far from PIMCO’s base scenario, which predicts three reductions for this year. If the new data on the inflation suggest that the process of disinflation in the short term may be somewhat faster than expected, the implications for inflation in the medium term are less clear. However, the Commission services’ new macroeconomic projections are likely to show headline inflation close to of the objective in 2025 and 2026”.
Gilles Moëc, chief economist at AXA IM, explains that many members of the Governing Council have already expressed their opinion on the rate reduction. It is therefore unlikely, according to him, that Christine Lagarde will deny this week that the conversation started internally. “The Council is, however, probably too divided – with varying degrees of patience – for it to engage in a precise discussion on the timetable. The recent data flow has not sent a clear signal. Core inflation fell less than expected in February and three- and six-month dynamics suggest a reacceleration may be underway. Still, doves can take solace in the fact that negotiated wages slowed in the fourth quarter of 2023 for the first time since the spring 2022, and they can easily point to weakness in the real economy to argue against a waste of time. Hawks can, however, argue that credit momentum has improved of late. We expect the news “Forecasts maintain ambiguity and we continue to believe that the first reduction will occur in June.”
Same story with Xavier Chapard, within the LBPAM research and strategy team. “After two upward inflation surprises, the ECB is expected to remain cautious at its meeting on Thursday, keeping monetary policy unchanged and remaining vague on the timing and magnitude of future rate cuts. That said , it should still revise downwards its growth and inflation projections for 2024, which would leave the door open for a first rate cut by the summer. We think that the ECB should start lowering its rates from June onwards, as inflation will approach the target in the second part of the year, although it will probably remain slightly above it.
Finally, Franck Dixmier, Global CIO Fixed Income at AllianzGI, affirms that the minutes of the European Central Bank meeting on January 25 clearly reflect the ECB’s state of mind, that is to say great caution: “the risks of lowering rates too early are greater than those of lowering them too late. An analysis which should not have changed since. In fact, nothing in the evolution of prices and wages suggests a rapid change in monetary policy. Consequently, the specialist estimates that the ECB should make its first rate cut in June, when it will have more perspective on the evolution of wages at the start of the year (salaries in the 1st quarter of 2024 will be published in May 2024). However, in a context of stagnation of activity in the euro zone, and particularly in Germany, where the government had to make a strong revision of 2024 growth to +0.2% over 2024 after a contraction of 0.3% in 2023, the pressure should increase on the ECB, which will over time have fewer and fewer arguments to keep rates where they are, especially since maintaining high real rates contributes to the tightening of financial conditions. Unless it plays on the size of its balance sheet. The markets only anticipate between 3 or 4 rate cuts in 2024, after a first cut in June, which seems reasonable to us”…