Fidelity International: March cut is unlikely

January 25, 2024

Faster policy transmission combined with rapid disinflation may well open the door for an earlier cut than the ECB officials are currently banking on.

‘At its first meeting in 2024, the ECB kept its borrowing costs unchanged, in line with consensus and our expectations. The policy statement saw some modest changes, sounding somewhat more optimistic on price pressures,’ concludes Anna Stupnytska, Global Macro Economist bij Fidelity International, today. ‘The reference to elevated domestic price pressures was removed and instead the ECB noted the ongoing ‘declining trend in underlying inflation’. The statement reiterated that the forceful transmission of higher interest rates into financing conditions continues. The key focus for investors in this meeting was on the guidance that the Governing Council was prepared to provide on the potential timeline for interest rate cuts. As expected, in the press conference, President Lagarde pushed against market expectations of earlier cuts (April), stressing the ECB remains data dependent, not date dependent, and the rate cut debate remains ‘premature’. The summer timeline is partly guided by data on negotiated wages which will only be available in full in late April, in time for June's meeting. Lagarde said they are seeing some stabilisation in their wage tracker, but more data is needed for a full picture – the ECB is prepared to wait for more information before moving the debate towards easing.

While Euro Area (EA) growth signals remain very weak, carrying over the sluggish – or mildly negative – momentum from 2023, there are no signs of significant deterioration in leading indicators in early 2024. Industrial activity remains subdued, but the services sector has picked up modestly and consumer surveys are showing signs of improvement. Falling inflation is boosting real wages and real disposable incomes, adding to consumer confidence. While this improvement is encouraging, we believe risks to growth are skewed to the downside, as tight policy continues to transmit into the real economy and the external sources of growth, including China's economy, remain weak.

At the same time, the process of disinflation continues, but continued strength in the EA labour market, highlighted by President Lagarde in the press conference on several occasions, continues to fuel concerns about elevated wage growth. These concerns will continue to dominate the ECB officials’ minds in the coming months until indicators of wage growth point to a sustainable disinflation trend. With the Red Sea disruptions also presenting upside risks to inflation, the ECB is signalling caution against premature cuts. With this in mind, we think the March cut is unlikely but the first cut in April does not seem to be completely off the table. Faster policy transmission, leading to significant growth deterioration, combined with rapid disinflation from here may well open the door for an earlier cut than the ECB officials are currently banking on.’