ECB Insight: Marking Time

6 March 2024

By David Barwick – FRANKFURT (Econostream) – Aside from a few outliers impatient for looser European Central Bank monetary policy (and a number favouring a particularly leisurely approach), it is apparent at this point that the Governing Council has its sights tentatively set on the June meeting as the most promising candidate for the first rate cut.


What the Council ultimately does will depend, as members tirelessly emphasise, on incoming data, a quantity of which is yet to come. But the recognition of June as the month to watch has been relatively clear for current circumstances, with uncertainty high, policymakers not in thrall to the calendar and forward guidance passé.


As such, Thursday is not shaping up to be an especially momentous occasion, and we see no reason for the ECB to want it to be. Even the most likely potential surprises in terms of communication may in a sense not matter. Surprises might be related to questions like:


i. How explicitly will ECB President Christine Lagarde encourage June expectations and/or rule out April?

ii. Will the ECB come up with a comprehensive set of clearcut preconditions for a rate cut?

iii. Will the Council for the first time in this cycle devote any time to the subject of policy easing and thus stop calling mere talk of it premature?


With so much of her colleagues’ commentary of late pointing towards June, it would be odd, barring a major forecast surprise, for her to pour water on such expectations, meaning she is likely to send messages that are at least consistent with the possibility of a first cut in that month.


That would represent a shift in messaging versus the January Council meeting, but with the first rate cut six weeks closer, a transition to somewhat more fitting language is appropriate.


Given the caution with which she has approached policy easing, though, we expect her to preserve optionality and steer clear of anything reeking of commitment. That said, we would not exclude a surprise in the form of a conditional suggestion endorsing expectations of June.


She will in no case want to be so dovish, however, as to lead markets to start fantasising again about April, while at the same time, prudence makes improbable a ‘never’ from her with regard to April. In a way, we see Lagarde as not having much room to manoeuvre, being boxed in by the ECB’s preference for current market expectations and the communication of so many Governing Council members.


Providing the precise constellation of numbers that would trigger a rate cut would, besides being complex and controversial, entail an unnecessary loss of valued flexibility, and as such is unlikely.


In contrast, some preliminary discussion of rate cuts has become more likely even if these remain premature, what with core inflation still elevated. As easing approaches, it just makes sense for the ECB to consider its various policy options. Clearly there is some appetite for such a discussion, with even some of those opposed to cutting rates soon willing to see the subject they’re all talking about publicly anyway make it onto the Council’s agenda on Thursday.


Either way, we reiterate that all these things seem to matter less, since – against the backdrop of the great deal of recent communication – it is hard to conceive of Lagarde taking things in any very different direction and rendering moot all the hints of recent weeks pointing to June as currently the most probable date. Both her potential hawkishness and dovishness seem limited.


A sampler of those hints could include:

  • Peter Kažimír (National Bank of Slovakia): ‘There is no reason to rush a rate cut. June would be my preferred date, April would surprise me and March is a no-go.’
  • Yannis Stournaras (Bank of Greece): ‘In my opinion, the end of the first semester of 2024 could see the optimal timing for our first interest rate cut’.
  • Joachim Nagel (Bundesbank): ‘I’m more comfortable about that [market repricing towards June].’
  • Gediminas Šimkus (Bank of Lithuania): ‘As I see it, June is really the month to consider the rate cut.
  • Robert Holzmann (Austrian National Bank): ‘My conjecture is to say we won't move before June in any case, but also not before the Fed.’
  • Edward Scicluna (Central Bank of Malta): ‘March could be it for all I know. We’ll see how many think that there’s no need to wait for June.’
  • Boris Vujčić (Croatian National Bank): ‘I would say that this difference between April and June doesn’t really make much difference for the economy.


Even in the case of those wishing to go faster (Scicluna) or slower (Holzmann and probably Nagel), it is evident that June is the reference point, the default. We note also that Kažimír and Stournaras, though at opposite ends of the hawk-dove spectrum, are clearly both also thinking in terms of a first rate cut in June.


All this doesn’t set the stage for the ECB to do much more on Thursday than mark time.


Some think that the ECB could shift the operational framework review into high gear and unexpectedly reach a conclusion in two days.


We don’t subscribe to this minority view. None of the various Governing Council members we’ve spoken to recently expected this, and for that matter, none of the public pronouncements by a range of them, up to Lagarde, have given grounds to anticipate this.


Nor do we see a motive for a rush that is in any case unnecessary, given the excess liquidity environment that will prevail for much time to come.