ECB Preview: Forecasts from 10 major banks, not on the verge of cutting yet, June moving into focus

The ECB meeting is likely to feature another round of downward inflation forecasts, but given the ECB’s willingness to wait for more labour market data, the main message is set to point to a baseline of a first cut in the summer. 

The ECB is set to take another step in its policy normalisation process, from a restrictive monetary policy stance towards a neutral stance. The new staff projections on growth outlook are expected to be revised lower this year and broadly unchanged in 2025/2026. Inflation is set to be revised to 2% for 2025. While neither the revisions to staff projections nor Lagarde will close the door to a rate cut at a specific meeting, we continue to expect that the key meeting for the first rate cut will be the meeting in June. We do not believe that the incoming data since the January meeting has been sufficiently weak to make April the baseline meeting.

Thursday's ECB meeting is unlikely to be very spectacular. We assume that the central bankers will not lower interest rates and that President Lagarde will try not to raise any false expectations at the subsequent press conference – either in one direction or the other. In this respect, the key sentence from the monetary policy decision is likely to remain unchanged, namely the ‘Governing Council considers that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this [2% inflation] goal.’ In addition, Lagarde could return to analyzing current wage developments and possibly give an assessment of profit margins. Ultimately, however, she is likely to refer to the data dependency of ECB decisions.

With inflation clearly heading in the right direction, this should be another straightforward hold for the ECB. We expect no major changes to the language or the projections.

The June meeting is increasingly in focus for discussing rate cuts. With our latest inflation forecasts showing rising confidence in meeting the target next year, we move our expected first rate cut from September to June. Another clear signal, even from more dovish ECB speakers, has been that rates are only likely to be cut gradually, something that fits with our view of quarterly 25 bps cuts. The outlook for inflation remains highly uncertain, however, and all eyes are rightly on the labour market. While wage growth should ease gradually, we fear that progress on core inflation could be slow, due to weak labour productivity dynamics, potentially slowing the rate cut path. Meanwhile, press reports suggest that we could see an announcement on a ‘demand-driven floor system’ for guiding short-term market rates earlier than expected, but well in line with our expectations.

Even without any rate action, the ECB meeting promises to be a very exciting one. With recent macro data, the pressure on the ECB to cut rates earlier has gone up. We still think that the ECB has good reasons to resist that pressure and to push back expectations. Nevertheless, the subtle changes in the official communication should continue, sending more precise signals for a June rate cut.

The ECB is expected to keep policy rates unchanged. Governing Council members, including President Lagarde, have signalled that they have become more optimistic about inflation, but that further progress needs to be made in the disinflationary process before they could be sufficiently confident that inflation was set to hit the ECB’s target in a timely manner and in a sustainable way. Therefore, we continue to expect a first rate cut in June.

We expect no policy changes at the March meeting. There is a small risk of a refinancing rate cut in order to narrow the corridor. Note that this would be a technical adjustment that should not impact the policy stance or market rates. June remains the first ‘live’ meeting in our view, but we still favour a first cut in September.

We believe ECB policymakers will continue to express a level of caution when assessing monetary policy. In that sense, we do not believe ECB policymakers are ready to make a pivot to rate cuts at this time, and we also believe the timing of an initial rate cut will now be pushed back until the middle of this year. While the Eurozone economy is on the verge of recession and experiencing no growth, inflation that is still above the ECB's target and wage growth that is likely still too high to achieve that target should keep the ECB on hold this week and for the next few months. In our view, inflation is still the primary focus of ECB policymakers, and the latest February inflation data and Q4 wage growth numbers should keep policymakers on hold until the June meeting. In June, we expect the ECB to deliver an initial 25 bps rate cut and communicate a still-cautious approach to rate cuts. In that sense, we believe rates will be lowered by 25 bps at each meeting after June, but a cautious tone may exist in official statements and communications from ECB President Lagarde and other ECB members. Delayed easing should keep economic prospects from surging for the time being; however, recent sentiment data at least suggest the Eurozone economy may be on a path towards recovery.

One should never be so arrogant as to say with 100% certainty that no changes will be made, but March is really early. We stand by our view that the Governing Council will wait until June when it can be more ‘confident’ that inflation is headed towards the 2% target in a ‘timely manner’.