ECB confronts anticipations today

The European Central Bank will keep interest rates unchanged at a record high on Thursday and is likely to push back on investor bets for aggressive policy.

By Ahmed Azzam | @3zzamous | 25 January 2024

Market open
  • No policy change likely for months

  • Markets see first rate cut in April or June

  • ECB awaits key wage data before rate cuts

The European Central Bank (ECB) is poised to maintain current borrowing costs for the third consecutive meeting, intensifying efforts to dispel notions of imminent interest-rate cuts. The deposit rate is slated to remain at 4%, prompting speculation on the potential duration of this stance. ECB President Christine Lagarde, aligning with several colleagues, suggests a probable reduction in the summer, although market expectations lean towards an initial move in April, a sentiment Lagarde is likely to counter.

The earliest juncture for monetary easing, as perceived by officials, is June, contingent upon reassurances of inflation converging towards the 2% target. Market dynamics, however, favor an April move, a dissonance that Lagarde is expected to address firmly in her post-meeting press conference.

June holds key to wage data

Crucial data on wage deals will only be accessible by June, emphasizing the cautious approach to recalibrating rates rapidly. Austrian central bank Governor Robert Holzmann cautions against taking rate cuts for granted in the face of uncertainties such as the Red Sea shipping turmoil.

Market awaits ECB president's stance

Following the upcoming ECB meeting, attention will be riveted on President Christine Lagarde's statements regarding interest-rate reductions. It is anticipated that she will amplify recent efforts to counter prevailing expectations in financial markets, discouraging projections of rate cuts materializing by April.

While market expectations for aggressive rate reductions have slightly diminished, there remains a pricing of 133 basis points in moves for the year. Concerns were expressed at December's policy meeting about overly dovish investor pricing potentially loosening financial conditions excessively, a trend that Dutch central bank Governor Klaas Knot emphasized could hinder monetary easing.

Contrasting signals amid mixed indicators and optimistic projections

Recent economic indicators present a mixed picture. January's surveys of purchasing managers signal a possible extension of a looming recession in the 20-nation euro area into the first quarter of this year, following indications of a potential downturn in the second half of 2023.

Despite the economic uncertainty, the labor market remains resilient, with an unexpected dip in the unemployment rate to 6.4% in November, matching June's record low but not alleviating concerns about second-round effects.

The ECB's December outlook projects a more optimistic view of gross domestic product growth, envisioning a rise of 0.6% in 2023, 0.8% in 2024, and 1.5% in 2025, in contrast to consensus views. However, Vice President Luis de Guindos, in mid-January, labeled growth developments as "disappointing."

Inflation registered a jump to 2.9% in December from a year earlier, up from 2.4% the previous month. The ECB attributes this uptick to temporary factors, expecting a slowdown in 2024, albeit less acute than in 2023, with a forecasted return to the 2% target in 2025.