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ECB expected to hold fire while signalling June rate cut

Markets expect Frankfurt to implement a sequence of rate cuts in the second half of 2024 but wage growth remains the chief worry

President of the European Central Bank Christine Lagarde addresses a press conference following the meeting of the governing council of the ECB in Frankfurt last month. Photograph: Kirill Kudryavtsev/AFP

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Thu Apr 11 2024 - 06:05

The European Central Bank (ECB) is not expected to lower interest rates at its meeting on Thursday but investors will be looking for confirmation that a June rate cut is on the cards.

The potential fly in the ointment is wage growth which is pushing inflation in the services sector, now seen as the stickiest part of the equation.

ECB policymakers have repeatedly highlighted first-quarter wage data, due out in late May, as a key reference point that will inform June’s rate decision.

Compensation per employee declined to 4.6 per cent in the fourth quarter from 5.1 per cent three months earlier but remains well above the 3 per cent level that Frankfurt considers to be in harmony with its 2 per cent inflation target.

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The ECB doesn’t offer clear guidance on the timing or the size of rate changes, leaving market analysts to read the tea leaves. In practice that means parsing ECB chief Christine Lagarde’s post-rate announcement commentary.

If she admits that rate-cutting discussions are under way in response to further signs of disinflation, this will be interpreted as laying the groundwork for a rate cut at its next meeting in June, according to Matthew Ryan of financial services firm Ebury.

“This week’s meeting will be an exercise in rhetoric for Lagarde. We think that she’ll proclaim that the bank has higher conviction that inflation is returning to target, while repeating that policymakers will have more information in June,” he said.

“She will probably also say that the first discussions on lower rates were had this week, which markets should perceive as a clear indication that a cut is almost certainly on the way at the next meeting,” he added.

Markets expect Frankfurt to implement a sequence of rate cuts in the second half of 2024, two or three or even possibly four but to proceed with caution. All of which will amount to a 1 per cent decline in rates by Christmas.

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