ECB Keeps Rates on Hold but Signals Summer Rate Cut

The European Central Bank (ECB) left all monetary policy settings unchanged, as was widely expected. The consensus forecast is for a 25bps cut by the ECB at its June 6th meeting and an additional 75bps in easing through the remainder of the year. The ECB has proclaimed it is watching inflation and wages data over the next eight weeks before beginning its easing cycle. Chief Lagarde said the ECB does not want to ‘pre-commit’ to a rate path (even after the first rate cut), but the lack of pushback to the possibility of a June rate cut means it’s a high bar for the ECB to stand pat then.

Lagarde Keeps Her Fingers Crossed

Today’s rate announcement followed the path set at the March 7th meeting where the ECB’s new set of forecasts with lower inflation at which Lagarde had already indicated they would not have enough information at hand by this week’s meeting to adjust policy. The risk to their inflation forecast has been oil. There has been a 15–20% year-to-date increase in crude oil prices. Lagarde today noted that a few participants felt sufficiently confident on the path for inflation to cut today.

Highlights

  • Main refinancing rate 4.50% vs 4.50% expected Prior 4.50%
  • Deposit facility rate 4.00% vs 4.00% expected Prior 4.00%
  • Marginal lending facility 4.75% Prior 4.75%
  • Most measures of underlying inflation are easing, wage growth is gradually moderating
  • Not pre-committed to a particular rate path
  • Will continue to follow a data-dependent approach and meeting-by-meeting approach
  • Inflation has continued to fall, led by lower food and goods price inflation
  • Domestic price pressure are strong and are keeping services price inflation high
  • ECB intends to discontinue reinvestments under the PEPP at the end of 2024
Euro Area Interest Rate

Conditions for a rate cut were explicitly laid out in today’s monetary policy decision statement.

  • These conditions Lagarde has already mentioned in past speeches or pressers.
  • The statement now reads “If the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction.”
  • Updated assessment’ is clears code for the June forecast round, where they will have key Q1 wages data and a couple more months of inflation data to revise projections.

The new statement also contains more detailed language about the council’s approach to future policy decisions, stating that it will follow a “data-dependent and meeting-by-meeting approach” and explicitly mentions not pre-committing to a specific rate path.

Inflation Watch

The new text highlighted the continued decline in inflation (led by food and goods prices) and that most measures of underlying inflation are easing, but it now notes the gradual moderation of wages growth and that firms are absorbing higher labor costs.

There is a shift from the more worrying language in the March statement that noted “domestic price pressures remain high, in part owing to strong growth in wages.” The ECB will also now ensure that its “policy rates will stay sufficiently restrictive” versus “policy rates will be set at…”; it’s a marginal change that seems intended to eliminate the possibility of a hike (that no one expects).

Market reaction

  • German yields fell back to pre-statement levels with the long-end underperforming alike the move in USTs after US PPI today.
  • EUR/USD fell about 8 pips on the decision, but EUR/CHF dropped.
  • Markets have ~20bps in implied ECB cuts by June (as pre-statement) and a total of 75bps by year-end; this compares to unchanged Fed June pricing and December incorporating a marginal 2/3bps in additional easing totaling 41bps.
  • Ahead of the decision, the market was pricing in just an 8% chance of a cut. However, that rises to 74% in June, which is the key question. There were 75 basis points in easing priced in for 2024.
  • Global yields rebounding has seen the mood turned sourer to now have the EUR down a small 0.1% vs the USD and practically flat versus the GBP, both compared to pre-decision levels.

Full rate statement from the ECB April rate decision

  • ECB keeps rates unchanged as expected.

11 April 2024

The Governing Council today decided to keep the three key ECB interest rates unchanged. The incoming information has broadly confirmed the Governing Council’s previous assessment of the medium-term inflation outlook. Inflation has continued to fall, led by lower food and goods price inflation. Most measures of underlying inflation are easing, wage growth is gradually moderating, and firms are absorbing part of the rise in labour costs in their profits. Financing conditions remain restrictive and the past interest rate increases continue to weigh on demand, which is helping to push down inflation. But domestic price pressures are strong and are keeping services price inflation high.

The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. It considers that the key ECB interest rates are at levels that are making a substantial contribution to the ongoing disinflation process. The Governing Council’s future decisions will ensure that its policy rates will stay sufficiently restrictive for as long as necessary. If the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction. In any event, the Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction, and it is not pre-committing to a particular rate path.

Key ECB interest rates

The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 4.50%, 4.75% and 4.00% respectively.

Asset purchase programme (APP) and pandemic emergency purchase programme (PEPP)

The APP portfolio is declining at a measured and predictable pace, as the Eurosystem no longer reinvests the principal payments from maturing securities.

The Governing Council intends to continue to reinvest, in full, the principal payments from maturing securities purchased under the PEPP during the first half of 2024. Over the second half of the year, it intends to reduce the PEPP portfolio by €7.5 billion per month on average. The Governing Council intends to discontinue reinvestments under the PEPP at the end of 2024.

The Governing Council will continue applying flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to countering risks to the monetary policy transmission mechanism related to the pandemic.

Refinancing operations

As banks are repaying the amounts borrowed under the targeted longer-term refinancing operations, the Governing Council will regularly assess how targeted lending operations and their ongoing repayment are contributing to its monetary policy stance.

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The Governing Council stands ready to adjust all of its instruments within its mandate to ensure that inflation returns to its 2% target over the medium term and to preserve the smooth functioning of monetary policy transmission. Moreover, the Transmission Protection Instrument is available to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across all euro area countries, thus allowing the Governing Council to more effectively deliver on its price stability mandate.

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:45 CET today.

Source: ECB, TC

From the TradersCommunity News Desk