Vanguard: ECB cuts interest rates by 75 basis points in 2024, starting in June or July

Vanguard: ECB cuts interest rates by 75 basis points in 2024, starting in June or July

22 januari 2024

ECB
ECB (2).jpg

At the 2024 World Economic Forum in Davos last week many ECB council members, including President Christine Lagarde, pushed back on markets pricing an April start to rate cuts. We expect a similar tone to be adopted at the ECB’s monetary policy meeting this Thursday.

The core of the Governing Council were consistent in signalling that the ECB need more data to be sure that the recent disinflationary pressure can be sustained. Specifically, they will look at underlying price pressures for Q1 as a whole, the impact of ending energy-crisis measures on demand, and wage data - some of which will only be available in 'late Spring'.

As such, the ECB are rallying around a Summer (June or July) start to rate cuts. Part of this, we suspect, is to push against the significant easing in financial conditions in the last two months. Lagarde stated that easing in the ‘summer’ is likely, while usually dovish ECB chief economist Lane said he is keenly awaiting new wage data, some of which will only be available by June, before making a decision. And even the usually hawkish Bundesbank president Nagel suggested that the summer may be an appropriate time to consider a cut.

A summer start makes sense to us – as this is consistent with the ECB’s historic reaction function. Plugging in our baseline forecasts for GDP growth and core CPI into the policy rule used by the ECB’s core ‘BASE’ model points to the first cut in June or July, as the blue line in the chart below shows. The limited deterioration in the labour market so far, despite a likely recession in H2 23, also gives the ECB room to ease relatively gradually as things stand. We stick to our view that the ECB will deliver 75bps worth of rate cuts in 2024, starting in either June or July.

That said, risks are skewed towards earlier, and more significant, rate cuts this year. Especially if the wage and CPI data in the coming months prove benign and/or the labour market starts to ‘turn on a dime’.

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