ECB Insight: Insiders See Data Deciding Frequency of Further Moves After First 25BP Cut In June

19 March 2024

By David Barwick – FRANKFURT (Econostream) – The European Central Bank Governing Council appears headed for a series of rate cuts of 25bp each, with the question of whether these cuts should only occur in conjunction with projection meetings still very much up in the air.


According to several insiders who spoke to Econostream recently, data yet to come were needed to determine the frequency of cuts, whereas the magnitude of the cuts was all but a given unless a major surprise put this issue on the table.


‘Regarding the size, everybody’s talking about 25’ basis points, one person said. ‘There isn’t any “50 or 25” debate.’


Another person, personally firmly opposed to cuts of more than 25bp, argued that there was no need for larger moves, which would just incite speculation about the size of each cut and thus create market turbulence easily avoided.


‘Once we do 25 a couple of times, it will be clear to everyone what to expect’, he said. ‘All we have to do is deviate once and every move we make after that will become a guessing game. Who needs that?’


True, the ECB had hiked not so long ago by varying amounts, he acknowledged. But monetary authorities at the time were confronting a real risk of getting behind the curve, a justification for non-standard moves not applicable to the current situation, he said.


Yet a third official also suggested that the coming discussion would be ‘more about frequency than about magnitude’ of rate cuts. Anything but a first 25bp cut in June would require a surprise, he said.


As to the debate about the frequency of rate cuts, the key question was ‘whether you move only at the meetings with new forecasts, or you also move at the ones without’, the first person said. ‘And that really depends on the data. If we see inflation coming down more quickly than expected, then we can move fast. If not, then the pace should be slower.’


At the moment, it remained ‘too early to say’ which rhythm would prevail. It should not be inferred from the higher probability of smaller steps that policymakers automatically saw this as implying a greater frequency, he said.


In any event, he added, expressing a sentiment echoed by the second person, ‘we will not announce that it’s going to be one or the other’ frequency of cuts.


The second person was more clearly inclined a priori toward cutting only at forecast meetings, arguing that it was natural for new data to drive policy moves and that only the macroeconomic projections rose to the necessary standard.


As he had with respect to the magnitude of the individual rate cuts, this person again argued that the ECB’s previously demonstrated willingness to hike at every meeting was less relevant to present circumstances.


‘We were behind the curve, or at least at risk of this’, he said. ‘There is no such danger now, so I don’t see why we should loosen our policy at top speed. Of course, if inflation plunged and the economy crashed, that would be different. But this isn’t how things are now or how we expect them to be, so we should stay calm and stick to our data-driven approach.’


The third insider did not reject the idea of cutting in the absence of updated projections. If for example the June forecast exercise brought a ‘big surprise’ in the sense of significantly weaker inflation prospects, then cutting by 25bp and subsequently awaiting new spot inflation data before potentially cutting by another 25bp in July was an option, he said.


This person echoed the first by also calling it ‘too early’ to come to a conclusion about the frequency of steps, suggesting that June data would be decisive for the ECB’s starting rhythm.


All policymakers expressed a clear expectation that the first rate cut would come in June.


A cut in April would require a ‘rather unlikely’ surprise in terms of sufficiently weaker wage growth and lower spot inflation, the first person said. The forecasts did not yet provide adequate comfort, having ‘turned out incorrect so often’, he said.


‘Inflation could suddenly become persistent at an unacceptable level’, he said. ‘Plus we've been saying for months that we really want labour market and wage data to get a better picture and be confident that we’re on a path of sustainable disinflation. That pretty much excludes April.’


The second person voiced similar scepticism about prospects for an April cut, noting that the latest US inflation data had exhibited a certain resistance. ‘I assume it won’t descend smoothly here, either’, he said. ‘We should expect sticking points.’


Nothing was likely to lead to a preference for a first cut in April in the case of the third person, who made an impassioned plea for June as presenting a virtually ideal set of circumstances.


‘There are risks all over the place in every direction, but on the one hand, market expectations finally align with our thinking, and that is not a bad thing’, especially since monetary authorities themselves had contributed significantly to this alignment, he said.


‘And on the other hand, the June forecasts should give us a lot of confidence about achieving our goal’, he said.


Still, no one wanted to exclude a first cut in April completely. Although the question had not arisen formally, let alone been put to a vote at the 7 March Governing Council meeting, it was clear from the discussion that despite considerable convergence towards June, ‘some think it could be in April’, the third person said.


Notwithstanding public statements, not everyone on the Governing Council was clamouring for June, the first person said, so that there would ‘have to be a discussion’ in April.


Delaying the first step beyond June seemed perhaps a somewhat more credible scenario for all officials than an April cut, though still unlikely. A delay would require surprises with respect to inflation and the labour market, according to the first person. ‘If we fail to see a slowdown of the pace of wage increases, and actually register an increase, that would be risky’, he said.


The second and third policymakers both emphasised the ease with which the materialisation of any of various geopolitical risks could upset the ECB’s vision of lower inflation pressures. The second also cited the unlikely possibility of a large upside surprise in the forecasts.


At least two of those who spoke to Econostream saw no need for the ECB to wait for the US Federal Reserve to move first.


‘That makes no sense, I think’, said the first person. ‘If we move in June, we're going to move before the Fed.’


The Governing Council fully expected to have sufficient confidence to initiate policy easing in June, regardless of the Fed, the third person indicated.


As to the extent of monetary accommodation to be expected in 2024, for the first person this depended on the still-uncertain frequency of the cuts. The second person assumed that rate cuts would only take place in conjunction with forecast updates, and suggested on this basis that the deposit facility rate would hit 3.25% by year’s end. The third person’s answer was not inconsistent with the second’s but allowed for the possibility of slightly more easing.


Econostream asked policymakers how they regarded the currently low sovereign spreads, in particular as regards Italy.


Two of them both said that Italian Prime Minister Giorgia Meloni had turned out to be unexpectedly moderate and flexible, and also suggested that the poor state of the German economy meant relatively limited macroeconomic divergence for the moment.


One of them further cited EU money destined for Italy and observed that the country had taken full advantage of previously low interest rates and substantially extended the average maturity of its sovereign debt portfolio.