ECB winks at April rate cut, but June is still the most likely start
Summary
The ECB’s tacit acknowledgement of money-market expectations for spring interest-rate cuts fuelled hopes for an early move by the bank but it remains likely that markets will have to wait until the summer for easing to begin.
The European Central Bank’s tacit acknowledgement of money-market expectations for spring interest-rate cuts are fuelling hopes for an early move by the bank but it remains likely that markets will have to wait until the summer for easing to begin, analysts say.
At last week’s policy meeting, ECB President Christine Lagarde stressed the bank’s reliance on data when making decisions. Talk of rate cuts is premature, she said, reiterating that rates could be cut in the summer, but also declining to push back against market pricing of an earlier start to an easing cycle.
Markets took this as an implicit approval of their pricing, and added a few basis points more to rate-cut expectations. The market currently prices in a first rate cut for April.
Over the weekend, Bank of France Governor Francois Villeroy de Galhau told financial weekly La Tribune that the ECB will cut rates this year, and that regarding the exact date, “not one is excluded, and everything will be open at our next meetings."
Still, a rate cut in April is far from certain, analysts said.
Expectations for an April cut look like “a case of unwarranted optimism," said Ronald Temple, chief market strategist at Lazard in a note.
While a springtime cut is a possibility, a lack of progress in bringing down inflation over the next few months could delay the first cut until June, said Matthew Ryan, head of market strategy at global financial services firm Ebury.
Incoming wage data amid the updated macro projections at the ECB’s next rate-setting meeting on March 7 will be key for the timing of the rate cut, said Martin Wolburg, senior economist at Generali Investments. The likelihood of a rate cut before June has nonetheless increased a little, Wolburg said.
Eventual monetary policy easing, which is subject to further slowdown in inflation, will support the bond market but isn’t likely to come in the next few months, said Nicolas Forest, chief investment officer at Candriam.
“If the disinflation process continues, the ECB will be able to loosen its monetary policy and provide further support for bond markets around June at the earliest," Forest said.
The ECB’s language on inflation nevertheless suggests that the central bank is comfortable that inflation is on a downward path, said Mohit Kumar, chief European economist at Jefferies.
“However, the reference to keeping rates restrictive as long as necessary suggests that we are still some way from cuts and supports our view that the first cut will be in June," he said.
Jefferies continues to expect the first interest-rate cut in June, and a total of 75 basis points in total this year.
Write to Emese Bartha at emese.bartha@wsj.com
