ECB Officials Saw Case For Rate Cut Strengthening In March
European Central Bank officials saw enough convincing evidence last month to conclude that the time for interest-rate cuts has almost arrived, an account of their latest policy meeting showed.
(Bloomberg) -- European Central Bank officials saw enough convincing evidence last month to conclude that the time for interest-rate cuts has almost arrived, an account of their latest policy meeting showed.
Policymakers convening in Frankfurt said inflation was making “encouraging” progress toward their 2% target — though they weren’t yet ready to sound the all clear, according to the account of the March 6-7 gathering, published Thursday.
“While it was wise to await incoming data and evidence, the case for considering rate cuts was strengthening,” the ECB said, citing its latest projections, progress on the three criteria set out to guide its assessment and lingering risks. It said the date of a first rate cut is now “coming more clearly into view.”
The ECB has identified June as the month to start lowering interest rates as inflation returns to its 2% target following the worst price spike in euro-zone history. Investors are now looking for pointers on how quickly monetary loosening will unfold, and where it will end.
Some officials are wary of allowing inflation to rebound, should they act too quickly, while others fear the bloc’s economy may be suffering unnecessarily under the weight of high borrowing costs.
Other key comments from the account:
On Interest Rates
- “There was consensus that it would be premature to discuss rate cuts at the present meeting. Instead, it was affirmed that it was important to be further along in the disinflation process and accumulate additional evidence for the Governing Council to be sufficiently confident that inflation was set to return to target in a timely and sustainable manner.”
- “Members underlined the need for policy to remain data-dependent and to continue to be based on the elements of the reaction function already communicated.”
- “It was highlighted that, in addition to new staff projections, the Governing Council would have significantly more data and information by the June meeting, especially on wage dynamics. By contrast, the new information available in time for the April meeting would be much more limited, making it harder to be sufficiently confident about the sustainability of the disinflation process by then.”
- “It was also recalled that the ECB’s focus and mandate were price stability in the euro area, although spillovers from other major policy areas would naturally be taken into account.”
On Markets
- “The point was made that financial and financing conditions – and thereby the effective monetary policy stance – had already eased and might continue to ease as markets repriced their rate expectations. Moreover, transmission was seen as weaker and slower for services inflation, which tended to be less capital-intensive and therefore less reliant on external financing.”
- “Market interest rates had risen since the Governing Council’s previous meeting. These had converged towards the views of analysts and now priced in three fewer interest rate cuts in 2024, with an 85% probability of a first rate cut in June. It was argued that this repricing reflected a recognition that disinflation was going to be slower and less certain than previously expected.”
- “In addition, spillovers from higher market interest rates in the United States were also mentioned. Market expectations for future interest rates were seen as broadly in line with macroeconomic fundamentals, including the inflation outlook and interest rate assumptions as embedded in the latest staff projections.”
- Note: Market expectations on March 6 were at about 90 basis points of cuts in 2024 — that compares with 140 basis points of cuts on Jan. 24, when the ECB’s previous meeting started.
On Inflation and Wages
- “Inflation was continuing to decline toward the 2% target broadly as expected, and this good progress was seen as encouraging.” But “a more uncertain, slower and bumpier disinflation process could lie ahead.”
- “Continuing uncertainty about the effects of the wage-profits-productivity nexus on domestic inflation highlighted the need for caution and for more evidence that core inflation would continue to decline. At the same time, there were signs that wage growth was starting to moderate. In addition, profits were absorbing part of the rising labor costs, reducing their inflationary effects.”
- “Questions remained about the sustainability of the disinflationary process, particularly in services and domestic inflation, on account of the uncertain outlook for wage growth, productivity growth and profit margins.”
On the Economy
- “Data available since the last Governing Council meeting had confirmed the bottoming-out of the euro area economy, which was being supported by foreign demand recovering and the continued solid growth in the United States, as well as recently some more positive news about China.”
- “Members widely acknowledged the weaker than expected growth in the short term. Economic activity had stagnated for five quarters in a row and was expected to remain weak for two more quarters.”
--With assistance from Ros Krasny, Alexander Weber, Mark Schroers, Andrew Langley and Greg Ritchie.
(Updates with market expectations in market section)
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