Carmignac: ECB not expected to lower its key rates before June

Carmignac: ECB not expected to lower its key rates before June

4 maart 2024

Monetair beleid
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Probability of a rate cut is close to 0% and the chances of hike, even slimmer.

‘Headline inflation is expected to be revised downwards. The weighted average of oil and gas prices is 10% lower today than the last time the ECB conducted its forecasting exercise, but revisions to its 2025 and 2026 core inflation projections should be modest, pointing at a return to target at some point next year,’ says Carmignac today. ‘The disinflation narrative should persist but so too does uncertainty over where prices will eventually land.

Ambivalence prevails when it comes to economic indicators. The ECB is caught between leading indicators waning (PMIs are in contraction territory) and progress on the most forward-looking components (new orders, new business and future output are at 10-month highs). Furthermore, the jobs market remains tight but wages are decelerating (the average wage growth advertised is less significant and negotiated wages in Germany are closer to pre-Covid levels). With data yet to indicate a clear path forward, barring no major ‘accidents’, we do not expect the ECB to lower its key rates before June.’

Implications for investors

‘The prospect of rate cuts on both sides of the Atlantic raises questions. Markets anticipate an equivalent number of cuts for the two central banks and at roughly the same time. However, the economic situation is very different between the two regions. The US economy is growing at a rate 1.5 times higher than its potential and in contrast, the eurozone is flirting with stagnation.

In this context, we favour European core rates over their American counterparts. And more generally, in fixed income, we favour yielding assets. Carry is attractive and tells investors to what extent time will play in their favour, after all, bond investors are paid to wait.’

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