The European Central Bank (ECB) is expected to maintain its current borrowing costs for the fourth consecutive meeting, but new economic forecasts could strengthen arguments favoring rate cuts later in the year. Analysts anticipate the deposit rate to remain at a record low of 4%, with most officials emphasizing caution despite inflation nearing the 2% target.
The upcoming quarterly forecasts by the ECB’s staff are likely to indicate a quicker path toward achieving the inflation target. This could provide policymakers with greater confidence as they consider unwinding their series of interest rate hikes. However, given that other major central banks like the Federal Reserve and the Bank of England are also deliberating on monetary policy adjustments, ECB President Christine Lagarde and her colleagues are not rushing into decisions.
Lagarde is expected to hint at a potential rate reduction in June, awaiting more clarity on the state of Europe’s labor market.
While some ECB members advocate for easing before June, many urge against premature action, emphasizing the potential repercussions of an inflation rebound. Bundesbank President Joachim Nagel cautioned against early rate cuts, citing the risks of moving too swiftly. Although February’s inflation data exceeded expectations, a Nowcast model by Bloomberg Economics suggests that inflation has dipped below the ECB’s 2% target for the first time since 2021.
One key aspect of Lagarde’s guidance will be whether she signals a rate cut in the summer, and if that rules out any possibility of a move in April. Economists’ projections vary widely, with some expecting three quarter-point reductions in 2024, while investors have scaled back their expectations for easing this year.
ECB projections for 2024
The updated ECB projections are anticipated to reflect a softer inflation outlook for 2024, while economic growth is expected to moderately improve. However, concerns persist regarding stubborn underlying inflation, particularly in negotiated wages, which remained elevated in the fourth quarter.
Beyond rate discussions, the ECB is poised to revamp its monetary policy framework, aiming for a smaller balance sheet while ensuring stable funding conditions for banks. Lagarde may provide insight into the timing of this overhaul, amid mounting controversy over remarks made by Executive Board member Frank Elderson regarding the central bank’s hiring practices and climate awareness.
