At the European Central Bank’s meeting, interest rates will likely be kept at their current level. However, all indications suggest that monetary policy will be eased in the coming months. Even those members of the Board considered as “hawks” are in favor of this move. The economy is weakening, and inflation is heading in the right direction. The sustained strong wage growth suggests, however, that central bankers will hold off on the first interest rate cut until June.
This means that we will probably not see any spectacular turnarounds that would shake the markets. Lagarde is likely to avoid raising false expectations during the press conference and will surely weigh every word, knowing that the markets can interpret everything excessively. It is very likely that we will hear the statement that the Board of Directors believes that the current interest rates in place for a long enough time will achieve a target of 2 percent inflation. Further decisions will probably once again depend on incoming data.
The Board of Directors is currently dominated by the “dove” faction, who more and more frequently speak about cuts. Among them are Philip Lane and Fabio Panetta. Neutral members include Schnabel and Boris Vujcic. Representatives of the “hawk” faction are also increasingly mentioned as potential supporters of a shift in monetary policy. At the end of January, Nagel admitted that inflation had been tamed, but a few weeks earlier, he dismissed the interest rate cuts scenario. Even Kazaks from the Latvian central bank admitted that we are likely to see gradual cuts this year, emphasizing the condition that the economy will not undergo a radical change. Meanwhile, Klaas Knot (a strong “hawk”) appears to be slowly changing his fundamental position and is no longer vigorously rejecting cuts in the money supply.
In Europe, inflation has fallen below 3 percent, although the base rate is still somewhat higher. At the beginning of this year, the growth rate of prices turned out to be below the ECB’s forecasts, so the institution will likely slightly adjust its new projections.
Despite a weaker economy and a gradually cooling labor market, wages remain the greatest risk for inflation prospects. Collective wages (4.5 percent) in the fourth quarter of 2023 grew slightly less year on year than in the third quarter (4.7 percent) – according to the ECB’s negotiated wage index. However, this level is still too high and will hinder the ECB’s goal in the long-term perspective.
Given the ongoing uncertainty, central bankers will probably wait for the publication of more detailed data to get a clearer picture of the factors currently driving inflation. Comprehensive data from Eurostat regarding wages, labor costs, and in particular, profit margins across the euro zone will only be available at the end of May.
At this moment, the most likely time for the first interest rate cut in the eurozone is June. The markets have revised their rather optimistic expectations upwards – at the beginning of February, they were still expecting the first interest rate cut in April.
This week, decisions about interest rates will also be made by the Polish Monetary Policy Council and the Bank of Canada. We will also receive monthly data on the US labor market. Powell from the Fed will have his speech, presenting a semi-annual report on monetary policy before the Senate Banking Committee (Thursday) and the Committee on Financial Services of the House of Representatives (Wednesday).
Łukasz Zembik Oanda TMS Brokers
