Rate-cut discussions are premature

The ECB left its monetary policy unchanged, in line with expectations. The information available since the December meeting has largely confirmed the central bank’s assessment of the medium-term inflation outlook, leaving the Governing Council (GC) in a wait-and-see mode. ECB President Lagarde confirmed her Davos comments, hence indicating that she still expects the first rate cut to come in summer, but the market is not convinced, and dovish remarks here and there actually fueled meaningful rate-cut expectations already for the April meeting. While the
ECB’s GDP and CPI forecasts will likely be revised down in March, the GC seems absolutely determined to play it safe on inflation, and this will continue as long as the labor market holds up. I still expect the first rate cut in June, followed by a gradual reduction at a pace of 25bp per quarter towards a broadly neutral level of 2%.

Despite ongoing weakness in indicators of economic activity, the GC appears relatively relaxed about the growth outlook, largely thanks to ongoing resilience in the labor market. The statement mentions signs of recovery in some leading indicators, despite most of them still pointing to broad stagnation in GDP.

Did Ms. Lagarde want to signal that the GC is warming up to the idea of an “early” start to the easing cycle? Probably not. Her rhetoric was mainly aimed at strengthening the message that the ECB is data-dependent, as opposed to calendar-driven.