For the ECB, patience is a virtue

Comments by Franck Dixmier , Global CIO Fixed Income at AllianzGI, ahead of the ECB meeting on 7 March 2024

• We don’t expect any rate cut from the European Central Bank at its monetary policy meeting on 7 March.
• Given the still fragile fall in inflation, the risks for the ECB of cutting rates too early are greater than the risks of cutting them too late.
• Investors will be paying close attention to the central bank's economic forecasts, as well as any indication of a first rate cut, which we expect in June.

For the European Central Bank (ECB), we think the risks of cutting interest rates too early outweigh those of cutting too late. The minutes of the ECB meeting of 25 January[1] reflect the central bank's caution – and their approach is unlikely to have changed since. In fact, the current evolution of prices and wages suggests monetary policy will not change any time soon.

Inflation in Germany did fall in February, with the consumer price index at +2.5%[2] (+2.9% in January), but core inflation remained stable at +3.4%, which is still a long way from the ECB's price stability target. A similar trend can be observed in the euro zone as a whole. Total inflation (the Harmonised Index of Consumer Prices[3]) decelerated in February to +2.6% over one year, compared with +2.8% in January. But core inflation came in at +3.1% in February compared with +3.3% in January. The main pressure point was inflation in services, which remains high (+3.9% in February, compared with 4% in January). Services inflation is the key factor to watch over the coming months.

Wage trends also remain uncertain. We think the modest slowdown in negotiated wages in the euro zone (+4.5% in Q4, compared with +4.7% over one year) would need to continue for the ECB to consider a shift in monetary policy.

We believe that the ECB could make its first rate cut in June, once it has more information on wage trends at the start of the year (Q1 2024 wage data will be published in May 2024).

Pressure on the ECB to lower rates is likely to increase against a backdrop of stagnating activity in the euro zone, particularly in Germany, where the government has had to make a sharp revision to 2024 growth to +0.2% over 2024 after a contraction of 0.3% in 2023. As months pass, we believe that the central bank will have fewer arguments to keep rates where they are, especially as maintaining high real rates contributes to the tightening of financial conditions. 

The markets are only expecting three and four rate cuts in 2024, starting with the first in June. This forecast seems reasonable to us. After the sharp correction in interest rates at the start of the year, investors will be paying close attention to two points. Firstly, the ECB's new macroeconomic forecasts, which are likely to lower its inflation outlook slightly. And, secondly, any indication of a discussion on the timing of the first rate cut.

[1] Published on 22 February

[2] Destatis, 29 February 2024

[3] Eurostat, 1 March 2024

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