Exclusive: ECB Insiders Confirm Caution Rules the Roost, Even as June Rate Cut Grows More Certain

15 May 2024

By David Barwick – FRANKFURT (Econostream) – The European Central Bank Governing Council is increasingly cautious about prospects for monetary easing beyond the policy meeting in three weeks, though that should not mislead anyone into questioning a June rate cut, according to three Eurosystem insiders who spoke to Econostream recently.

‘What we are seeing in the US provides support for some upside risks to inflation that we have been mentioning’, including the possibility that services inflation was ‘going to be more persistent than we are expecting’, one person said. ‘This is something that we can understand from the US, perhaps.’

Under the circumstances, it made sense for monetary authorities to approach easing with yet greater caution, he agreed. ‘At the ECB, we continue to be data-dependent, but in the current context, even more than before’, he said. ‘I think it is not prudent to set a path.’

The ECB would have enough information in June to make that meeting’s decision, ‘but not enough to give you the decision in July, or the decision in September’, he said.

Policymakers would ‘start from a clean slate’ after June, he said. ‘This is the ideal scenario for us, because 25bp means nothing in terms of economic activity or inflation dynamics. We’re not going to move the curve and we’re not going to move the exchange rate, because it’s already priced in. And a deposit rate of 3.75% is still restrictive.’

The difference between 4% and 3.75% was ‘irrelevant’, given the ECB would still retain complete freedom to determine the other key element of policy restriction besides level, namely duration, he said.

A second insider called it ‘much too early’ to speculate as to how many rate cuts would be possible by the end of 2024. Whatever the likelihood of a surprise was, it was currently ‘higher than some time ago, given the accumulation of all this uncertainty’, he said.

At September’s Governing Council meeting, monetary authorities would have important additional information, including about the US, and there ‘could be a change’ in either jurisdiction that would influence European monetary policy, he said.

‘If in March I’d predicted four rate cuts, then now I might have to say I only expect three’, he said. ‘But the point is that no one knows. No one can know. The only thing where we are much more confident is June.’

Still, this person said he would be ‘shocked’ if, in the absence of a negative medium-term change, the ECB only cut rates this year in June.

All insiders made clear that June was virtually a done deal.

‘It’s too late’ to rethink June, a third insider said categorically, though he simultaneously professed to having scaled back his expectations of the extent of this year’s easing by the ECB.

The second one said that he wished speculators betting on no June cut ‘a lot of luck’, adding, ‘I wouldn’t make that bet, but some people in the market have money to lose.’

The first insider noted that the ECB had shown its willingness previously to surprise the markets, and said that if it did so again now, it would only be following the examples of the US Federal Reserve and the Bank of England.

An unexpected failure of the ECB to cut in June ‘would not cause a dramatic change of developments’, he said. ‘But the more than 90% probability [of market expectations of a June cut] is a strong signal.’

Markets were pricing in about 23.5 basis points of easing in June as of Wednesday afternoon.

Insiders didn’t want to sound the all-clear on the subject of wage developments, with one suggesting that they could be determined in June to have been ‘a bit more dynamic’ than anticipated, while another said they had ‘not behaved very differently than we have been expecting over the last few months.’

The latter of the two observed however that productivity had become of greater concern and that a lack of improvement in this respect in Europe would imply that ‘any level of wages creates inflationary pressure’.