The European Central Bank (ECB) announced a downward revision to its annual inflation forecast on Thursday while confirming the widely anticipated decision to keep interest rates unchanged.
ECB President Christine Lagarde indicated that market expectations for a rate cut in June were aligning with policymakers’ projections.
The latest staff projections for inflation in 2024 were adjusted to an average of 2.3%, down from the previous forecast of 2.7%. Looking further ahead, the staff anticipates inflation reaching the ECB’s 2% target by 2025 and then moderating to 1.9% in 2026.
Additionally, the forecast for economic growth in 2024 was revised downwards to 0.6% from the previous estimate of 0.8%, signaling a gradual improvement in the euro zone’s economic activity from its current stagnant state. Growth is expected to pick up to 1.5% in 2025 and 1.6% in 2026, slightly weaker than previously forecasted in December.
Lagarde emphasized during a press conference on Thursday,“We are more confident as a result, but we are not sufficiently confident, and we need more evidence, more data, and we know this data will come in the next few months. We will know a little more in April and a lot more in June.”
Policymakers have consistently highlighted May as a crucial month, given the release of wage settlements during that period.
Lagarde underscored the ECB’s vigilant focus on two inflationary factors that could surprise—wage growth and profit margins. She also cautioned about the possibility of a downside surprise to the outlook if monetary policy exerts a stronger dampening effect on demand than anticipated or if the global economic conditions deteriorate unexpectedly.
Anticipations ‘Aligning’
The announcement has fueled market speculation about potential interest rate cuts occurring during the summer of this year.
In recent weeks, market sentiments had already shifted towards anticipating a rate cut in June. The ECB’s key rate currently stands at 4%, up from -0.5% in June 2022, after a series of 10 consecutive hikes.
Christine Lagarde stated on Thursday that market expectations were “seemingly aligning more closely” with the ECB’s perspective. Earlier this year, policymakers were prompted to firmly push back against market speculations of rate cuts in March or April.
Lagarde further mentioned on Thursday that the ECB wouldn’t necessarily wait for headline inflation to reach its 2% target before making a decision.
Eurozone inflation moderated to 2.6% in February from 2.8% in January. However, the core inflation figure, which excludes energy, food, alcohol, and tobacco, remained relatively stable at 3.1%.
Moderately Accommodative
Antonio Serpico, senior portfolio manager at Neuberger Berman, shared that the most probable scenario entails rate cuts commencing in June, with a reduction of 25 basis points per meeting, totaling 150 basis points or more overall.
“The numbers provided quite a reassurance actually; we weren’t anticipating any cuts today,” he informed CNBC’s Silvia Amaro.
“Today’s decision appears to be relatively dovish,” he noted, highlighting the downward revisions in both growth and inflation forecasts.
“This indicates that the ECB governing council perceives growth to be more sluggish and lower than previously anticipated… and the new projections for both headline and core inflation are decidedly weaker compared to the earlier ones.”
He emphasized that the main variable would be the persistence of core inflation, influenced by a tight labor market. Core inflation projections were adjusted to 2.6% in 2024 from 2.7%, and to 2.1% in 2025 from 2.3%.
Antonio Serpico, senior portfolio manager at Neuberger Berman, shared that the most probable scenario entails rate cuts commencing in June, with a reduction of 25 basis points per meeting, totaling 150 basis points or more overall.
“The numbers provided quite a reassurance actually; we weren’t anticipating any cuts today,” he informed CNBC’s Silvia Amaro.
“Today’s decision appears to be relatively dovish,” he noted, highlighting the downward revisions in both growth and inflation forecasts.
“This indicates that the ECB governing council perceives growth to be more sluggish and lower than previously anticipated… and the new projections for both headline and core inflation are decidedly weaker compared to the earlier ones.”
He emphasized that the main variable would be the persistence of core inflation, influenced by a tight labor market. Core inflation projections were adjusted to 2.6% in 2024 from 2.7%, and to 2.1% in 2025 from 2.3%.
