ECB Preview: Forecasts from 12 major banks, another hold, cuts around the summer

This ECB meeting is set to see few, if any, new policy signals, given the limited new information that has been released since the December meeting. We expect President Lagarde to confirm that the next policy rate change is most likely a cut, which may happen in summer. We expect Lagarde to repeat the three key criteria for setting the policy rates, which should point to the new staff projections in March as key. 

Recent comments from the ECB Governing Council members have clearly suggested that rates are unlikely to be lowered in the near term. The ECB is in a data-dependent mode, so weak data could yet shift such expectations. After the December attempts failed and given the recent repricing towards less aggressive rate cut expectations, the ECB is unlikely to push strongly against current market expectations. We continue to expect the first 25 bps rate cut in June, followed by quarterly 25 bps decreases in rates, though risks are tilted towards both earlier and steeper cuts.

The ECB needs more confidence about the inflation outlook before easing policy. We are not unsympathetic to the view that the ECB may start cutting in June, but we maintain a slight preference for September. Wage dynamics need to improve visibly before we can fully subscribe to an earlier cut. Moreover, attacks on ships in the Red Sea inject new uncertainty into the outlook. We expect no changes to the policy stance at the January meeting.

As usual, the January meeting is unlikely to deliver any policy changes or major policy messages, involving instead a reflection on the year ahead. In light of our slightly weaker inflation forecasts, we have moved our first rate cut to September, but there is high uncertainty as regards the data, implying that no cuts this year are also possible.

This should be another straightforward decision – we and the unanimous consensus expect another hold. The Governing Council will likely keep its language largely unchanged.

The ECB is likely to be keen to significantly dampen euphoric market expectations about rapid interest rate cuts, even though the members of the ECB Governing Council recently commented on possible interest rate cuts in 2024 at the Economic Forum in Davos. Communication is likely to focus on the development of wages and profit margins as well as geopolitical risks.

We expect the ECB to stay on hold and give very little indication about the timing of any upcoming rate cut. We don’t expect this meeting to be a turning point for Eurozone rates or for the Euro.

We expect the ECB to stay cautious on the inflation front and continue pushing back against a rate cut in Q1. We continue seeing the first rate cut in April (50 bps back to back in April-June and 150 bps in total in 2024) amid weak growth and inflation ahead.

The ECB is expected the keep policy unchanged. A whole range of ECB officials have been setting out their views on monetary policy over the last few days. The overall message is that it is too early to declare victory in their fight against inflation and hence to start cutting policy rates. Yet they judge that data is moving in the right direction and rate cuts are likely to come in the summer. Our base scenario is that the ECB will cut interest rates by 25 bps in June.

No changes to policy are expected. The last gathering was just a little over a month ago, and there were a couple of quiet weeks nestled in there given the holidays and all. So if not January, then when? There had been some rumblings about the March 7 meeting being ‘live’ but they were silenced pretty quickly, given the emphasis on the first quarter wage negotiations, and their eventual impact on business pricing and consumer spending. April 11 is unlikely as there won’t be any updated staff forecasts to lean on. That brings us to June 11 (also our call). Also, the ECB will start the process of normalizing its balance sheet on July 1, which coincides nicely with the first cut. How many more cuts to follow will depend on the data but 75 bps for the year should be a minimum.

The ECB is widely expected to hold its Deposit Rate at 4.00%, but there will be significant interest in its assessment of the economy and potential hints into the timing of monetary easing. While we ultimately think weak Eurozone growth and softening inflation could prompt a rate cut as early as April, we think it's unlikely this week's policy announcement will endorse such a path. Instead, for the time being, we would not be surprised to see the ECB repeat that it "considers that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution" to returning inflation toward target.

The January meeting should sound hawkish, but probably won’t offer much new, likely leaving it to the 31 January Fed gathering for a more decisive near-term steer with the HICP flash for January due the following day on 1 February. So far, the largely consistent hawkish message from the ECB has underwhelmed in its market impact. The desire to avoid a premature loosening in financial conditions began in December with the message that the HICP projections (of which end-2025 is most important) were conditioned on a market rate path with a cut-off of 23 November, clearly implying they would be higher on a mark-to-market basis (with HICPX only just ‘sliding’ to 2.1% in 4Q25).