ECB President Christine Lagarde during the Davos Forum.DENIS BALIBOUSE (Portal)
In Frankfurt the waiting pattern continues. The European Central Bank (ECB) is expected to freeze interest rates this Thursday at 4.5% – 4% taking into account the deposit facility – despite weak economic growth in the euro zone. With no changes in sight, markets will look to the speech from the institution's head, Christine Lagarde, for clues as to when interest rate cuts will begin.
Everything indicates that the pressure within the ECB will be greatest in the coming weeks: the European economy continues to cool, lending continues to decline and inflation is easing. Analysts are doubling down on their bet that the price of money will fall soon, even as geopolitical tensions in the Red Sea again urge caution amid the threat of another distribution logjam.
Diplomacy has now become a central banker's job. Lagarde will have to keep the balance again this Thursday to convince the markets that she will not let up in the face of a possible increase in inflation and that at the same time the economy continues its soft landing despite the poor economic data in January in Germany. So far, the Frenchwoman has managed to ensure that her plans do not fail: the eurozone continues to avoid recession and inflation fell from 9.2% at the end of 2022 to 2.9% in December 2023.
International organizations, from the IMF to the Central Bank Coordinator (BIS), are calling on issuing institutions not to give up on the risks that remain on the horizon: the crisis in the Middle East and the delay of governments in withdrawing stimulus from the economy. However, markets believe that European institutions will soon stop worrying about inflation and refocus on what appears to be a major underlying problem: the Old Continent's anemic growth. In its latest forecasts, the ECB forecasts a meager 0.8% increase in GDP in 2024, just two tenths more than in 2023. However, activity data in January suggests that the bloc's largest economy, Germany, remains without an upward trend remains
Given governments' inability to launch new stimulus packages, analysts believe the only way to boost growth will be to cut interest rates before the summer. “In the absence of fiscal stimulus and we need to be more autonomous in expanding our economy, the only solution to boost growth and jobs is to lower interest rates,” says Philippe Waechter, chief economist at Ostrum AM. “The ECB will not do it at Thursday’s meeting, but it is what needs to be done to avoid greater risk to activity.”
In fact, the ECB will not make any new forecasts in this week's Council. And like most monetary institutions, Frankfurt has declared itself to be “dependent on the data” it receives. In particular, the development of three indicators: the CPI, underlying inflation and the transmission of monetary policy. December data underscores that prices continue to weaken, although ECB board members have warned of possible recoveries in the coming months. As for the effectiveness of the rate hikes, the latest available data suggests that bank lending continues to decline across the eurozone.
“Probable” decline
With the leverage of the price of money still cooling the economy, the ECB is particularly watching the development of wages and business margins in economies that this time have a strong labor market. However, the managing director of the BIS, Agustín Carstens, predicted last Monday: “So far we see no signs of a wage-price spiral unfolding.”
Perhaps for this reason, it is no longer taboo for Lagarde to talk about future interest rate cuts. In a recent interview on Bloomberg, the Frenchwoman said that a cut was “likely” from the summer onwards. “We are saying that we rely on the data and there is still some uncertainty and there are some indicators that are not anchored at the level that we would like to see them at,” he warned.
Nevertheless, the markets are already pricing in central bank cuts. This is happening in the United States, where stock markets are once again reaching historic highs, and in Europe, where debt markets or the Euribor have eased. “It is an eternal paradox of monetary policy: the longer you wait for a change in interest rates, the less necessary it becomes,” says Felix Feather, an economist at the investment firm Abrdn.
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