MNI ECB Review - January 2024: Inching Closer To Cutting Rates
Inching Closer To Cutting Rates
The ECB left policy unchanged at the January meeting and although there were no material surprises in the press conference, the underlying messages were notably dovish. The words “domestic prices pressures remain elevated” from the December press statement were removed, President Lagarde sounded optimistic on inflation trends and, despite stating that it was premature to discuss rate cuts (presumably as of the January meeting), she did not forcefully push back against the possibility of a policy rate cut in the spring.
If the ECB operates on a data dependent basis, as often stressed by President Lagarde, then in theory no future policy meeting can ever be off the table. We would still argue that absent a marked shift in the economic and inflation data, June seems the earliest time that the ECB would consider a cut. This would provide time to gauge developments in wage growth, which has been repeatedly highlighted as a key determinant for the inflation outlook. Moreover, as we previously asserted, the ECB was cautious in tightening policy when inflation was on the up and it is likely that a high degree of caution will remain with inflation now on the way down. The ECB is highly cognizant of the risks of misjudging the inflation outlook and is overshadowed by the now infamous 2011 policy misstep.
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