ECB Insight: A Rate Cut Everyone Can Support, and Then a Clean Slate

4 June 2024

By David Barwick – FRANKFURT (Econostream) – Much of what filled this space ahead of the 11 April monetary policy meeting of the European Central Bank Governing Council remains valid now, starting with the idea that, as we said at the time, ‘a first rate cut in June should be everyone’s central scenario.’

The June meeting is finally upon us, and while the ECB probably wishes in retrospect that it had communicated in a way leaving it more flexibility about the choices facing it in two days, we would exclude any decision on Thursday not featuring a 25bp rate cut and are virtually certain the decision will be unanimous.

Thereafter, things are, and have been for some time, considerably murkier. We like the phrase used by an insider we cited three weeks ago. The ECB would ‘start from a clean slate’ after the June cut, he said.

Not that policy won’t be subject to a bias. The bias of course favours easing, and that more of this is coming was evident in the latest interview with Chief Economist Philip Lane, who, as noted, was perfectly happy to address the ‘how’ of further rate cuts this year, the question of ‘whether’ being settled, for him anyway.

Although ECB President Christine Lagarde at the press conference won’t discourage the idea that the next move (barring a huge surprise) will be down, we expect her to make clear that the date is up in the air, and to repeatedly invoke the meeting-by-meeting, data-dependent approach.

To be sure, less than two weeks ago Lagarde a bit brashly allowed how she was ‘really confident that we have inflation under control’ and ‘confident that we’ve … gone to a controlled phase.’ That would be compatible with the ECB offering more clarity on Thursday than we expect about the rate path ahead.

Indeed, we doubt Lagarde will again deploy such messaging, which was premature and inconsistent with other views on the Council, not to mention with more recent data. Policymakers Econostream spoke to recently were clear about their preference for leaving things strictly data-driven.

That applies in particular to prospects for a July cut. We neither rule one out nor expect Lagarde to, just as she never excluded a cut in April. She is likelier to employ tactics reminiscent of March, letting it be understood that July might not be ideal, given the important additional information available in September.

There are other arguments for a modicum of strategic ambiguity when it comes to July. The ECB has waited until June to cut precisely out of a fear of easing too soon. Being still far from certain that it won’t yet encounter developments that warrant a pause, it hardly wants markets to think that the floodgates are now wide open and rate cuts can proceed apace.

When it comes to pace, Lagarde may be invited to endorse the idea of quarterly steps. Any clear stance on this wouldn’t be consistent with data-dependence. And yet, when the flow of incoming information is reduced to a trickle, data-dependence favours a quarterly pace, as this just happens to be the rhythm with which the most important data, namely the updated projections, become available.

Finally, we recall Board member Isabel Schnabel’s remark two weeks ago that as part of Lagarde’s effort to obtain consensus, ‘you have to make compromises and the June cut is probably one of such compromises - if it happens.’

The fact that the ECB is cutting in June is surely something of a compromise in and of itself, but ‘last mile’ concerns not having been allayed entirely, avoiding encouragement of hopes for back-to-back cuts seems to be a reasonably logical other aspect of a compromise.

The key elements of the monetary policy statement need not differ much from 11 April. We think for example that the ECB can easily reiterate that ‘future decisions will ensure that our policy rates will stay sufficiently restrictive for as long as necessary.’

In the end, Lagarde mainly has to stay data-dependent and avoid the temptation she succumbed to in that recent interview to - in effect - declare victory when a large portion of the Council is still far from ready to join her in any victory dance.

If Lagarde is casting about for something else to say, then a few words about the departure of highly respected Bank of Spain Governor Pablo Hernández de Cos, whose last day in office will be next Monday, would come as no surprise.

If she wishes to offer more interesting insights on the subject of monetary policy than the short-term outlook calls for, she can share some of the details of the Council’s recent retreat in Ireland, which included an initial discussion of the next strategic review.

And it is not hard to imagine Lagarde underscoring the historical nature of the moment. After all, the last ECB rate cut was in September 2019, but – monetary authorities already being up against the lower bound – was a mere 10bp and limited to the deposit facility, so was really more of a technical adjustment.

The last ‘genuine’ rate cut - 25bp or more applied to all key interest rates - was in December of 2011, at which time only one of the current Governing Council members was present.

That was De Nederlandsche Bank Governor Klaas Knot, who was probably opposed then (we don’t recall specifically, but he has generally favoured tighter policy), but, along with the other hawks of today’s lineup, seems very likely to support this Thursday’s cut.