A man protects himself from the rain under an umbrella as he walks past the Euro currency sign in front of the former European Central Bank (ECB) building in Frankfurt am Main.
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“The January ECB meeting this Thursday is, as usual, unlikely to bring any policy changes or major policy messages, but rather will involve a reflection on the coming year,” economists at Société Générale said in a note on Tuesday.
Minutes from the ECB's December meeting, released last week, showed that it is highly unlikely the central bank will raise interest rates again but that any discussion of easing is seen as premature. The minutes point to a status quo until at least June, said Société Générale.
Still, markets expect around a 60% chance that the first rate cut will take place in April, according to a Portal analysis of LSEG data. High expectations of a rate cut in March have been pushed back in recent weeks, but April prices remain unchanged despite numerous ECB officials arguing that rate cuts may be premature.
Dutch Central Bank President Klaas Knot told CNBC last week at the World Economic Forum in Davos that current market bets could be “self-defeating” because “the more easing the market has already done for us, the less likely we are lower interest rates.”
ECB President Christine Lagarde told Bloomberg that she agreed with those who believe a summer interest rate cut is likely, but stressed at the time that she remained “cautious” and data-dependent in her final outlook.
Headline inflation in the euro area rose in December, rising from 2.4% to 2.9%, largely due to base effects from the energy market. Core inflation fell from 3.6% to 3.4%.
Price increases have cooled faster than some central bank officials expected, although they stress the work is not yet done. Many see risks in geopolitical volatility and the labor market, as well as the need to wait until late spring for European wage negotiations to conclude.
“Lower inflation and more balanced inflation risks” argue for a policy reversal in April and cuts of 125 basis points this year, economists at BNP Paribas said in a note last week.
“We expect the ECB to propose on January 25 that it is moving closer to the start of its normalization cycle, but without announcing an impending rate cut or declaring victory in the fight against inflation,” they said.
UBS is calling for a cut in April — but not with confidence, Reinhard Cluse, chief European economist at UBS, told CNBC's “Street Signs Europe” on Wednesday.
“I think you can't be very confident about a rate cut in April. We previously expected June, but then brought it forward to April,” he said, citing the need for further data releases.
“Now, with the hawkish comments, particularly in Davos, we have actually signaled that the risks to our statement that the first rate cut will come as early as April have certainly increased,” Cluse said, adding that the March meeting of the ECB would be more significant than in January due to the publication of new staff forecasts on wages and growth.
Berenberg economists disagree with current pricing for a 25 basis point rate cut in April and nearly 150 basis point rate cuts throughout 2024. The need to wait for pay data in April and May, as well as full growth and staff inflation forecasts at the end of the first quarter, makes it more realistic that cuts will come in June rather than April, analysts said in a note Tuesday.
Berenberg expects inflation to pick up again next year and that labor shortages will prevent a sustained decline in wage inflation, limiting the ECB's potential to ease monetary policy.
The economists at Société Générale are taking an even more cautious approach.
“We have postponed our first rate cut from December to September, but there is a lot of uncertainty around the dates, which means no rate cuts are possible this year either,” they said on Tuesday.
The comments echo those of ECB archhawk Robert Holzmann, who said in Davos that he “can’t yet imagine us talking about cuts because we shouldn’t talk about them. Everything we have seen in the last few weeks points in the opposite direction, so I can assume there will be no cuts at all this year.”