The ECB meets for the final time this year on Thursday and the consensus is that it will keep the deposit rate at 4.0% for the second meeting in a row. A further rate hike should now be ruled out completely with a more neutral outlook highly likely. But the bank may fall short of endorsing market bets on rate cuts as early as March, even though policymakers saw downside surprises to the most recent inflation data.
Price pressures have cooled sharply in the past few months, hitting a more than two-year low of 2.4% y/y in November, while the core dropped to 3.6% from 4.2%. On the growth front, Q3 GDP is currently estimated to be around -0.1%, whilst more timely survey data saw a pick-up in the Eurozone composite PMI for November from 46.5 to 47.6. But ultimately this is still pointing to negative growth in the final quarter of this year. In the labour market, the unemployment rate remains just above its historic low which means policymakers are continuing to keep an eye on firm wage growth.
ECB chatter less hawkish?
Even ECB policymakers have been taken by surprise by the speed at which inflation has come down lately. Indeed, the tone has started to shift quite substantially within the Governing Council with a lot of attention placed on recent remarks from Germany’s hawkish Schnabel. She noted that further hikes were “rather unlikely” after November inflation data cooled and was surprised by the big drop in core inflation. These remarks have subsequently accelerated pricing for 2024 rate cuts with a March reduction priced with around 70% probability.
Markets will watch for any signalling for 2024 policy action coming via the accompanying staff macro projections. These will probably see downward revisions for growth and inflation in 2024 and 2025. Ultimately, markets don’t see much upsetting the disinflationary downward trajectory and combined with the weakening economic backdrop, futures price in over 115bps of rate cuts next year.
But it’s likely that the ECB will fall short of providing guidance on the timing of the first policy rate cut while repeating its call for a data dependent stance. The more President Lagarde pushes back against rate cut talk, the more support the euro should get.
The single currency has come under considerable pressure recently from the ramping up in rate cut expectations, slipping below $1.08 and the 200-day simple moving average. Should Lagarde endorse in some way the market’s more dovish view in her press conference, this surprise would see further losses in the euro.
Here are the key numbers to know ahead of the meeting:
