The European Central Bank (ECB) has announced a lowering of its annual inflation forecast and has decided to hold interest rates steady. This move was widely expected by market participants. ECB President Christine Lagarde also indicated that market pricing for a rate cut in June aligns with the policymakers’ outlook.
In terms of inflation projections, the staff at the ECB updated their forecast for 2024 to an average of 2.3%, down from 2.7%. Looking ahead, they anticipate inflation reaching the ECB’s target of 2% in 2025 and then cooling further to 1.9% in 2026. As for economic growth, the staff revised their forecast for 2024 to 0.6% from 0.8%, indicating that the euro zone’s economic activity is gradually recovering from its current stagnation. They project a GDP expansion of 1.5% in 2025 and 1.6% in 2026, slightly weaker than the December outlook.
During a press conference, Lagarde stated, “We are in the disinflationary process and we are making progress.” She expressed confidence but emphasized the need for more evidence and data, which will become available in the coming months. Lagarde highlighted May as a crucial month since wage settlements are expected to be released then. The ECB will closely monitor two areas of inflation that could surprise: wage growth and profit margins. Lagarde also mentioned that if monetary policy dampens demand more than anticipated or if the global economic environment worsens unexpectedly, it could lead to a downside surprise in the outlook.
Following the announcement, market expectations for rate cuts in the summer increased. The euro traded 0.3% lower against the British pound, and bond yields fell. Market expectations have shifted towards a rate cut in June in recent weeks. Lagarde noted that market pricing seems to be converging with the ECB’s own view. Earlier this year, policymakers pushed back on market bets for rate cuts in March or April.
Lagarde clarified that the ECB does not need to wait for headline inflation to reach its 2% target before making a decision. Euro zone inflation eased to 2.6% in February from 2.8% in January, but the core figure, which excludes energy, food, alcohol, and tobacco, remained sticky at 3.1%.
Antonio Serpico, a senior portfolio manager at Neuberger Berman, stated that the most likely scenario involves rate cuts beginning in June, with reductions of 25 basis points per meeting, totaling 150 basis points or more this year. He described the decision as relatively dovish, given the downward revisions in both growth and inflation forecasts. Serpico highlighted the stickiness of core inflation as the main variable, driven by a tight job market.
In conclusion, the ECB’s decision to lower its inflation forecast and maintain interest rates reflects its cautious approach to monetary policy. Lagarde’s comments indicate that the ECB is closely monitoring various factors that could impact inflation and economic growth. Market expectations for rate cuts in the summer have increased, and the focus will be on core inflation and wage growth in the coming months. The ECB’s actions will depend on the availability of more evidence and data, which will shape its decisions in the future.
