Will the ECB cut before the Fed?
What did the ECB decide. Facts and scenarios in the commentary by Martina Daga, Macro Economist, AcomeA SGR
Today's ECB monetary policy meeting is in a transition phase: in fact, we are now moving from the cycle of increasing reference rates towards the beginning of the cycle of cuts. At the end of last year, the market expected the first cut by the ECB already during this meeting, these expectations were then revised in the first part of 2024, pricing the first cuts in June of this year and a total of around 100 bp by the end of the year. Indeed, at today's meeting the ECB decided to keep the reference rates unchanged and the deposit rate at 4%, the Main Refinancing Operation Rate at 4.50% and the Marginal Lending Facility Rate at 4.75%. Monetary policy rates have now been at a standstill since September last year, when the last increase in the cycle of increases was decided which, in just over a year, led to a rise in reference rates of a total of 450 bp .
The decision was taken in a macroeconomic framework, outlined by Lagarde during the press conference, characterized by weak economic activities, in particular driven by weak exports which partly reflect the region's loss of competitiveness and, partly, lower external demand. However, with inflation slowing and wage growth still strong, the recovery in purchasing power is expected to begin to support consumption. The unemployment rate is at historic lows and this figure, read together with substantially stagnant economic activities, indicates a contraction in output per worker. As regards inflation, the latest data indicate a cooling in the growth of consumer prices and, although wage pressures remain the greatest source of risk, the outlook on these now seems less worrying, as the most recent data show a slowdown in the speed of growth and, furthermore, wage growth is partly absorbed by company margins, therefore weighing only marginally on consumer prices.
DOSSIER RATES AND INFLATION FOR THE ECB
On the occasion of this monetary policy meeting, the macroeconomic forecasts of the ECB staff were revised, according to which inflation in 2024 will be on average equal to 2.3%, lower than the estimates formulated in December when inflation in 2024 was expected to be 2.7%. %. The downward revision was mainly driven by the energy component, but the less volatile price forecasts were also marginally revised downwards, to 2.6% in 2024, to 2.1% in 2025 with the 2% target being reached in 2026. financial conditions remain restrictive and weigh on demand, which is why economic growth forecasts have been revised downwards in 2024 (from 0.8% to 0.6%) and then resumed in 2025 and 2026, when growth of 1.5% and 1.6% respectively is expected %. The effectiveness of the restrictive monetary policy is reflected in the downward revision of inflation estimates and growth estimates in the short term. It should be noted that GDP growth has been revised downwards only for 2024. A recovery in the growth of economic activities, supported by consumption and investments, is expected from next year.
WHAT WILL HAPPEN NOW
What to expect? The ECB continues to not give clear indications on the next monetary policy moves, but maintains a "meeting by meeting" approach and the forward guidance on the next moves remains strictly dependent on macroeconomic data. Despite the downward revision of inflation projections, the ECB is not yet ready to start with the cycle of cuts, the committee needs more data to be more confident that the inflation target will be reached. Lagarde indicated that in April the picture will be a little clearer, but they will only have a little more data than now. In June, however, they will have much more data available and the picture will be much clearer.
THE SCENARIOS FOR THE ECB
Considering the evident divergence in the macroeconomic situation between the Eurozone and the United States, one wonders whether the ECB is ready to cut before the Fed. Lagarde specified that once they are sure they have kept rates in restrictive territory long enough and will be sure of reaching the target, they will be able to start with the cycle of cuts, regardless of the actions of the other central banks.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/la-bce-tagliera-prima-della-fed/ on Thu, 07 Mar 2024 15:17:44 +0000.