ECB interest rates, markets are certain: stop in April and cut in June. Now the focus is on the July move

The path that the European Central Bank will take at the next two meetings of its Governing Council seems clear. Thursday will see a final interest rate pause, with many central bankers preferring to wait for more inflation and payrolls data to arrive in late May. Instead, markets now consider the first cut to be certain in June, when the new macro forecasts are published.

Therefore, analysts' attention on Thursday will be focused on the words of ECB President Christine Lagarde, especially regarding the pace of cuts after June.

Waiting for Lagarde's words about the function of the European Central Bank's reaction

Lagarde has stressed in recent days that the ECB's decisions will remain “meeting-by-meeting” and “data-driven.” This means that “even after the first rate cut, we cannot commit to a certain rate path,” Lagarde said. Therefore we should not expect very clear announcements on Thursday, but rather information about how the central bank will respond to new data on inflation and wages (the so-called “reaction function”).

Positions of central bankers in the European Central Bank

ECB central bankers have so far expressed different views on this year's interest rate cutting cycle. Dutch hawk Klaas Knot has indicated his preference for cuts at meetings in which Frankfurt will update its overall forecasts. This means three cuts of 25 basis points in June, September and December. Therefore, deposit interest rates will fall from the current 4% to 3.25%.

In the same vein, German Central Bank President Joachim Nagel said that the first cut will not include similar moves in subsequent meetings. Nagel therefore wants to avoid overly dovish expectations (Dovish) from the markets.

Other conservatives lean toward faster and more significant cuts. Frenchman Francois Villeroy de Galhau and Maltese Edouard Scicluna did not rule out intervention on Thursday either. Greek Yannis Stournaras said he supports the double cuts in June and July.

Bank of Italy Governor Fabio Panetta confirmed that “conditions are being created to begin monetary easing.” ECB Executive Committee member Piero Cipollone stressed that the ECB must be prepared “quickly” to reduce the restrictive direction of monetary policy.

Spaniard Pablo Hernandez de Cos and Portuguese Mario Centeno expressed their concerns about the economy. Markets expect three to four interest rate cuts this year.

Latest positive data on inflation and wages

The hypothesis of a more sustainable pace of reductions is also linked to the positive trend of the latest data. Eurozone inflation fell more than markets expected in March, to 2.4% from 2.6% in February. And even inflation essenceThat is, net energy and food, fell in March by more than expected to 2.9%, from 3.1% in February. Only the data related to services showed some resistance but this also happened due to the Easter holidays, this year in March.

Regarding wages, the latest figures have shown a slowdown that does not lead to expectations of an unexpected increase. On the contrary, a survey conducted by the European Central Bank yesterday showed that European companies expect a smaller increase in wages and selling prices in the coming months than expected in November. Corporations reduce profit margins while allowing wages to rise without causing inflation.

Even after the first cuts, ECB interest rates will remain constrained and put pressure on eurozone GDP, which has already been at a standstill for more than a year, unlike in the United States. Given the different state of the economy, the ECB's move before the Fed's move will not pose a problem. For Frankfurt, the greatest risks appear to stem from extremely slow maneuvers in the coming months. (All rights reserved)