BlackRock: ECB says 'you can't hurry rate cuts, you just have to wait'

BlackRock: ECB says 'you can't hurry rate cuts, you just have to wait'

January 25, 2024

Monetary policy
ECB (07)

The ECB will cut rates in 2024 but isn’t in a hurry. Markets will have to wait until the ECB is convinced price stability is being restored.

‘The ECB will cut rates in 2024 but is in no hurry – it still considers its inflation fight unfinished,’ comments BlackRock today. ‘As expected, the central bank kept all policy rates on hold at today’s meeting. President Lagarde emphasized “data dependency” instead of ‘date dependency’ – but did not push back strongly against market expectations of rate cuts starting in April.

We expect headline inflation to fall to – or even temporarily undershoot – the ECB’s 2% inflation target in 2024 as the impact of the energy shock unwinds and ECB rate hikes bite. Most inflation measures have continued to ease and economic activity remains subdued.

But this is still not a return to the world as we knew it, we think. With a tight labour market and subdued productivity, wage pressures could remain high, causing euro area inflation to rollercoaster back up again once energy and goods prices have finished adjusting. It will likely take at least until the spring wage negotiations for the ECB to gain confidence that inflation is returning durably to 2%. That's why we think the ECB will not rush into cutting rates.

We expect continued volatility in bond markets and stick to our tactically neutral stance on euro area government bonds. Market pricing for the size of rate cuts this year looks less ambitious than for the Fed – even though we think the ECB has hit the brakes more aggressively than the Fed. What would it take for the bond market rally to continue? Consistently weaker macroeconomic data, any unexpected further progress on the inflation front and even more euro area fiscal consolidation ahead than currently anticipated, leading to lower bond supply.

Bottom line: The ECB will cut rates in 2024 but isn’t in a hurry. Markets will have to wait until the ECB is convinced price stability is being restored.’

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