ECB Insight: No Bolts out of the Blue This Week

23 January 2024

By David Barwick – FRANKFURT (Econostream) – We have a hard time imagining surprises emerging from this week’s European Central Bank Governing Council meeting, the stage having been so well set in the runup to the occasion.

At least 16 of the Council’s 26 members weighed in between 10 January and the last day before the ban on public pronouncements began on 18 January. Many of these members expressed themselves at length and more than once, and spoke to key issues, including ECB President Christine Lagarde and Chief Economist Philip Lane. Isabel Schnabel, the other particularly influential member of the Executive Board, spoke once.

This offers greater pre-meeting context than is usual even for the loquacious ECB. By way of comparison, during the equivalent period before the 14 December monetary policy meeting, only a bit more than half as many Governing Council members had voiced their views, with neither Lagarde nor Lane among them.

As such, room for bolts out of the blue on Thursday seems limited. Little leads us to believe that the ECB would be any more willing than last time to assign a clear date to the start of easing. True, various Council members seem to be pointing towards June as a promising candidate, with Lane having said on 13 January that ‘[b]y our June meeting, we will have those important data.’

Latvijas Banka Governor Mārtiņš Kazāks more than a month ago already said, ‘Most likely it looks like the middle of next year — in June or July’, whilst Bank of Lithuania Chairman Gediminas Šimkus told Econostream last week that ‘the probability of a cut won’t turn really significant until we’re in June.’

As previously explained, we don’t think Lagarde intended last Wednesday to endorse as explicitly ‘likely’ the idea of any specific timing for a first rate cut, even if her language was ambiguous. It remains early for the ECB president to go further than Lane’s observation, echoes of which were already evident in other remarks by Lagarde the same day:

‘We will know a lot more probably in April-May, because the numbers, the bargaining agreements are being negotiated in the first quarter of every year, and the results come in after the agreements have been closed’, she said then.. ‘So that gives us indication that we can, you know, corroborate, and verify in the late spring, I would say, of ’24.’

This is the sort of wording we would expect again; it clearly runs counter to exectations of easing in April (let alone sooner), pointing instead to late spring/early summer (i.e. the 6 June or 18 July meeting) while making the precise date data-dependent.

Governing Council members are by and large quite comfortable leaving things like that for now. Even dovish policymakers – with the exception of Mário Centeno, who heads the Banco de Portugal and appears to be an outlier - avoid encouraging overdone market speculation. Banco de España Governor Pablo Hernández de Cos explained on 10 January that the answer to the question of how long rates should stay where they are before ‘gradually’ reducing them ‘will depend on future data developments, in a context where the level of uncertainty remains high.’

And Central Bank of Cyprus Governor Constantinos Herodotou in an interview with Econostream said that ‘a lot more data shall be available during the first half of 2024, which are necessary for the calibration of future decisions. Any discussion regarding the time and potency of the first rate cut, as well as the pace of further cuts thereafter, would be premature at the moment and would not constitute a data-dependent approach.’

It would be natural for Lagarde as well to use the word ‘premature’ or the like. Similarly based on recent rhetoric, we expect her to shun any talk of ‘mission accomplished’, to reconfirm that the peak has in all probability been reached and to preach the necessity of maintaining restrictiveness for an indefinite period.

We also anticipate some pushback by the ECB president against market rate expectations of early and vigorous monetary policy easing, though the recent repricing would allow her to be moderate in tone. Many Council members have expressed concern about the divergence between what markets anticipate and the rate assumptions underlying the inflation projections.

‘It is not helping our fight against inflation if the anticipation is such that, you know, [expectations are] way too high compared to what’s likely to happen’, as she observed most recently and will probably observe again in two days.

What about the monetary policy statement? We suggested already in December that the ECB could tweak this to say that its future decisions will ensure that policy rates ‘remain at’ – rather than ‘will be set at’ - sufficiently restrictive levels for as long as necessary. However, we feel now as then, namely that such a change isn’t really necessary.

In general, the entire exercise needn’t deviate much from last time. Even the forecasts are likely to be seen as more or less on track (pending the PMIs on Wednesday and Germany’s IFO index on Thursday), despite slightly weaker developments for both growth and inflation.

For those wanting excitement, the 7 March meeting and press conference are more likely to satisfy such appetites, as the new forecasts due then may fuel or, as the case may be, dampen expectations of easing. Indeed, this Thursday could be the last uneventful monetary policy meeting for a while.