Comments by Nadia Gharbi, Senior Economist, Pictet Wealth Management
As expected, the European Central Bank (ECB) remained on hold at its monetary policy meeting today. There was no major surprise coming from ECB press conference, but on the margins our impression is that the likelihood of a rate cut being delivered before summer has increased.
The focus today was on the ECB’s updated assessment of growth and inflation since its last meeting in December. In the event, ECB president Lagarde stressed at the press conference that “the incoming information broadly confirmed ECB’s previous assessment of the medium-term inflation outlook”. On balance, encouraging news on the inflation front outweigh upside risks. The emphasis on “domestic price pressures” was also reduced somewhat.
On the timing of rate cuts, Lagarde said that the consensus inside the ECB was that “it was premature to talk about cuts”, but she could have pushed back more strongly against market pricing (betting on more than two 25bp rate cuts by June). That she decided not to is an important signal in itself.
She reiterated that the ECB is firmly in data-watching mode for now and highlighted the importance of wage developments for the inflation outlook, but she did not sound as concerned about wage growth as she used to be, noting that alternative indicators such as the Bank of Ireland or Indeed wage trackers were pointing with a stabilisation, if not a slightly improving picture along with declining job vacancies.
Lagarde mentioned that the ECB is “very carefully” monitoring the situation in the Red Sea and that so far the impact of attacks on tankers there appeared to be moderate.
The final catalyst could come from the January HICP report to be released on 1st February. Another downside surprise to core inflation would lead to significant revisions to ECB staff projections, increasing further the likelihood of a rate cut in April or in June.
Meanwhile, tighter monetary policy continues to be transmitted “forcefully” to the real economy as reflected in overall activity data, and bank lending in particular. This week’s Bank Lending Survey showed ongoing tightening in credit standards and weakness in loan demand, although leading indicators were more encouraging.
Our baseline scenario still foresees a first rate cut of 25bp in June, but we believe that the 11 April meeting will be a live one. We see the deposit rate at 3.0% by the end of this year.
