All eyes turn towards the Eurozone and the European Central Bank (ECB) which will announce its interest rate decision at 13:15 GMT. The ECB is anticipated to maintain the main refinancing operations rate unchanged at 4.5%. Since the market doesn’t expect a change in interest rates, they will focus on any statement regarding the timing of interest rate cuts.
Investors will closely monitor the accompanying statement and the post-decision press conference for any clues regarding rate cuts. With the release of better-than-expected preliminary manufacturing PMI figures for January from Germany, France and the Eurozone, the ECB may have room to push back on market expectations of rate cuts. In this situation, the EUR could strengthen. However, if the bank’s statement is mainly dovish, then the EUR could drop.
Last week, ECB President Christine Lagarde commented that the central bank could start cutting interest rates from late summer. She also warned that inflation remained much higher than where it should be based on the ECB’s target.
The market is currently pricing in the first rate cut for the coming April, with over 5 cuts priced in for 2024. The market expects the ECB’s main interest rate to drop to 2.59% by the end of the year.
Will the ECB indicate a rate cut this summer?
Rate cuts are all the rage among market participants and major western central banks are carefully assessing economic conditions to make the right decisions. One of the key concerns is the risk of acting too soon and having to stop and reverse course. With the market currently pricing in around 4 rate cuts for the UK and 6 for the US, the ECB is in the middle of rate cut expectations. While these expectations may change, market participants will be very interested in today’s meeting and will scrutinise any comments by Lagarde and the ECB statement to see whether their expectations reflect those of the bank and its plans for potential rate cuts. In a Bloomberg interview a week ago, the ECB President said that a rate cut in the summer is likely, but such a decision will be based on economic data.
The ECB President is expected to comment on the weakening economy but highlight increasing wage growth which remains inflationary. In Germany, the latest wage growth for Q3 came in at 7.3% which is higher than the ECB’s 2% inflation target. The central bank will have to strike the right balance as it makes it decision on monetary policy.
Will the ECB follow the Fed?
Last week in Davos, Lagarde appeared to send the message that the ECB will follow a similar dovish path as the Fed and proceed with easing, and today investors will be looking to see if she sticks to her guns. The euro has strengthened this week but weakened slightly ahead of this meeting. A dovish message could push it lower.
What the analysts have said
Economists at MUFG Bank expect the ECB to repeat that rate cuts are unlikely until the summer and that the bank’s update will be relatively hawkish. They believe that the ECB President sent a clear message about the potential timing of the first ECB rate cut in the summer. The bank may also highlight inflation risks from geopolitical tensions in the Middle East. The updated guidance from the ECB suggests that the earliest rate cut may be in June although market participants are still pricing in a high probability that the first cut could be delivered in April.
ING analysts expect that the ECB President will avoid any commitment regarding the timing of rate cuts, and she may emphasise that the bank’s decisions are data-dependent, which could help support the euro.
While most analysts don’t expect the ECB event to be a risk event, as ING analysts have noted, the “carpet could be pulled from under the Euro should President Lagarde somehow convey the message that the policy rate will be getting cut in the summer after all.”