Fidelity International: US economic resilience keeps ECB in check

Fidelity International: US economic resilience keeps ECB in check

Interest Rates ECB
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Anna Stupnytska, Global Macro Economist at Fidelity International, responds to the ECB's interest rate decision:

'At its March meeting, the ECB left its policy rates and guidance unchanged, in line with expectations. The downgrade to both growth and inflation forecasts for 2024-25 came across as a dovish signal, and in her press conference President Lagarde cautioned that risks to growth are still tilted to the downside.

At the same time, Lagarde emphasised that while progress on inflation has been made, more is required for the Governing Council to be sufficiently confident inflation is heading back to target.

Since early 2024, we are seeing some tentative signs of green shoots in Euro area activity, as witnessed by modest improvements in the PMIs, especially in services across the board. Consumers are getting more optimistic on lower inflation and higher growth in real disposable incomes as of late. While this improvement is encouraging, we agree with Lagarde's comments that 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 disinflation process is well under way, with wage growth in Q1 2024 being the remaining piece of the inflation puzzle for the ECB. Signs of moderation are already emerging, as Lagarde also noted in the press conference today. Once most data is available in late April and in the likely scenario of it pointing to easing wage pressures, the ECB should be ready to kick off the rate cutting cycle which we expect to be at the June meeting.

The path from there, however, will in part depend on the Fed, which we believe might have to push back the start of its own cutting cycle to later in the year, given continued resilience of the US economy and evidence of inflation persistence. So, while the ECB may well be the first major central bank to start cutting rates, it might not be able to do much more until the Fed joins in.'