BlackRock: Santa didn't come early, ECB still more hawkish than the market

BlackRock: Santa didn't come early, ECB still more hawkish than the market

December 15, 2023

Monetary policy ECB
Kerst - Decembermaand.jpg

Santa didn't come early to the euro area, as the ECB suggested at today’s policy meeting that rate cuts are unlikely to come as early as next March, as the market hopes. The ECB is not ready to declare victory in its inflation fight.

Still, Christmas stockings aren’t being left completely empty: 2024 will be the year of the policy turnaround, and Lagarde did not explicitly rule out cuts in the first half of 2024, reasserting the ECB’s data dependence. Moreover, while the ECB announced it would speed up quantitative tightening earlier than expected, the pace will be modest and only start in the second half of 2024.

We expect headline inflation to fall to – or even temporarily undershoot – the ECB’s 2% target in 2024 as the impact of last year’s energy shock unwinds. Most inflation measures have continued to ease more than expected and economic activity remains subdued, as reflected in the ECB’s revised forecasts.

But this is still not a return to the world as we knew it, we think. Labour shortages and subdued productivity mean inflation pressures will persist. Wage settlements will be key, we think, and it will likely take until the spring 2024 wage negotiations for the ECB to gain confidence that inflation is returning durably to 2%.

We expect continued volatility in bond markets and stick to our tactically neutral stance on euro area government bonds. Widening peripheral bond spreads remain a risk. The bond market rally relies on consistently weaker macro data, the absence of any unexpected further progress on inflation and even more euro area fiscal consolidation than currently anticipated, leading to lower bond supply.

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