MFS: Tone of ECB press conference will retain bias to keep rates on hold

MFS: Tone of ECB press conference will retain bias to keep rates on hold

24 januari 2024

ECB
europese centrale bank (ECB).png

We expect no change in ECB policy rates or quantitative tightening policy when it meets this week. The tone of the press conference is likely to retain a bias to keep rates on hold for as long as necessary to ensure inflation gets sustainably to target, says Pater Goves, Head of Developed Market Debt Sovereign Research with asset manager MFS.

'The growth outlook continues to be subdued and incoming data suggest a negative print for Q4 GDP is plausible with monthly industrial production, construction output and retail sales all negative in December. Lagarde is therefore likely to note that risks to the growth outlook are to the downside. When it comes to inflation, despite a small uptick to 2.9% in HICP in December and more upward pressures likely in January, the general picture is one of falling inflation amid an environment where the transmission of monetary policy is occurring forcefully. Even the hawks, such as Schnabel, admit to this. Lower energy prices will also support headline inflation falling in the months ahead.'

Our view remains that the weak growth outlook (with activity below potential for many quarters ahead) and falling inflation will mean cuts can happen sooner rather than later. Given tightening financial conditions and a cooling labour market, an increase in real policy rates rises risks of overtightening.  Exactly when cuts come will of course depend on the data – which so far point to alignment with this thesis.

Although much is priced and some push back by Lagarde can be expected, we remain constructive on core euro area duration with a steepening bias. QT policy has come out predictably and transparently and despite heavy supply, EGB spreads have actually been grinding tighter. There has been no 'QT shock' and with this in mind, we struggle to see a negative catalyst for spreads to widen in the near term.

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