La Française: Preliminary discussions about interest rate cuts will begin

March 5, 2024

It is widely expected that the Governing Council (GC) will keep its policy rates on hold at the March meeting for the third consecutive meeting. Inflation has not receded sufficiently at this stage.

The European central bank (ECB) will release their new quarterly macro-economic projections. We expect them to show lower headline inflation, especially in 2024 given the falling of gas prices, to an all-time low since 2021.

However, we do not expect material change in core inflation (which excludes energy and food) over the projected time horizon due to the tight labor market and robust wage growth. Core inflation will probably stand above the 2% ECB target until 2026. In this context, we believe the GC will not want to cut interest rates too quickly, despite debate as to when to start. 

Please find below what we expect:

• The European Central Bank (ECB) to maintain its key interest rates at 4.0% for the deposit rate, 4.5% for the Refi rate and 4.75% for the marginal lending facility.
• ECB President Lagarde to reiterate that even though the latest inflation data are encouraging, ECB officials need to be more confident that the disinflation process is sustainable. Therefore, Christine Lagarde will reaffirm that it is still too early to cut interest rates.
• The ECB President to indicate that the timing of the ECB’s first cut will remain data dependent, and especially dependent on wage growth data.
• Compared to December 2023 projections, we expect that Euro GDP growth for 2024 will be revised slightly down, from 0.8% to 0.7%, and will remain broadly unchanged for the next two years at around 1.5 % per year. In terms of prices, we expect that the headline HICP (Harmonised Index of Consumer Prices) will be projected lower this year, down by 0.3 percentage points (pp) to 2.4% and to be quite similar to the December forecasts for 2025 and 2026, respectively at 2.0% (-0.10 pp downgrade from December) and 1.9% (unchanged). In parallel, core inflation will decline over the projection period, from 2.6% in 2024 (-0.10 pp compared to December 2023 projections) to 2.2% in 2025 (-0.10 pp compared to December 2023 projections) and then converge to the 2% objective with 2.1% in 2026 (unchanged).

To conclude, we believe that the ECB will try to buy more time for future decision-making regarding interest rate cuts.

During the press conference, Christine Lagarde will probably keep a balanced tone: she will reaffirm the ECB’s strong commitment to bring inflation back towards its 2% target. Overall, the economy is more resilient, and inflation is receding more slowly than originally anticipated some weeks ago. Hence, a change in monetary policy stance is less pressing. The ECB still has time and can wait until June. All in all, we expect little impact on financial markets.