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The European Central Bank left all the benchmark rates unchanged, including the deposit facility rate at 4%. President Lagarde emphasised that the Governing Council remains non-committal on the path ahead but was comforted by ongoing disinflation. Mar inflation slowed to 2.4% yoy vs 2.6% month before, along with a sub-3% core. While goods inflation has fast receded, services at ~4% yoy in the past five months has been too high for comfort. Nonetheless, the ECB clarified that rather than expecting all sub-segments to return to the 2% target, focus will on the path/direction before deciding to shift policy gears. The official statement provided the strongest signal yet that rate cuts were around the corner, as they remarked “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.”.
This leaves the door open for a cut in June, in our view. For one, the updated macroeconomic projections out in June are likely to strengthen ECB’s confidence that inflation was on course to return to the 2% target. Negotiated wage growth slowed a notch in 4Q23 vs quarter before, while the unemployment rate stayed at all-time lows. Another round of wage data will be released ahead of the June review. Global oil price rose sharply last month, with its impact dampened by slippery energy inflation which has declined ten of the past twelve months. Incoming economic activity data has been stabilising, but still reflecting anaemic momentum. Factoring in domestic developments, the likelihood is high that the ECB kickstarts its rate cut cycle ahead of the US Fed. We expect a measured 25bp cut in June, followed by another 75bp reduction by end-year, before hitting a plateau. This would partially unwind the aggressive policy tightening moves undertaken in the past two years, also taking into the account a non-linear path ahead for inflation.
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