© Reuters. FILE PHOTO: A view reveals the brand of the European Central Financial institution (ECB) outdoors its headquarters in Frankfurt, Germany March 16, 2023. REUTERS/Heiko Becker/File Photograph
By Francesco Canepa and Balazs Koranyi
FRANKFURT (Reuters) -The European Central Financial institution faces a tough balancing act on Thursday because it probably slashes its forecasts for progress and inflation whereas making an attempt to mood hypothesis about imminent rate of interest cuts.
The ECB is for certain to go away borrowing prices at report highs, with the one doable coverage change regarding the tip of its final surviving bond-buying scheme – a legacy of the COVID-19 pandemic.
However the central financial institution’s final assembly of the yr might be something however uninteresting, with President Christine Lagarde beneath stress to defend or ditch her steerage that charges will keep the place they’re for the following couple of quarters.
Investor expectations level to a primary charge minimize within the spring, which can make the ECB the primary main central financial institution to reverse course after a world, concerted effort to convey down inflation since mid-2022.
Lagarde is prone to push again towards rate-cut bets after it took the ECB a yr and a half, and 10 straight hikes, to steer inflation onto a convincing downward path.
“We expect the ECB to acknowledge that inflation has declined more rapidly than expected but to be coy about declaring victory prematurely,” Deutsche Financial institution economists mentioned.
The Federal Reserve signalled late on Wednesday that decrease borrowing prices are coming subsequent yr, with policymakers indicating as much as three cuts, making any ECB pushback even tougher.
The euro firmed greater than 1% towards the greenback on the Fed’s dovish commentary and charge minimize expectations jumped, with markets now pricing in 155 foundation factors of ECB easing subsequent yr, together with two strikes by April.
This pricing mirrors expectations for the Fed with two strikes seen by Could 1 and 155 foundation factors over the course of 2024.
WEAKER GROWTH AND INFLATION
Up to date financial projections are prone to reinforce markets views of an ECB pivot as they’re set to indicate decrease inflation and progress, significantly for subsequent yr, bringing them nearer to consensus estimates.
Economists polled by Reuters see costs within the euro zone rising by 2.5% in 2024, 2.1% in 2025 and a pair of% in 2026 – closing in on the ECB’s goal after an outsized 5.5% enhance this yr.
“Lagarde will be facing a tricky balancing act,” UniCredit mentioned in a observe. “We doubt that she will want to lean strongly against the current, very aggressive, market pricing.”
However wage knowledge, due solely within the late spring, will play an important function in shaping the speed path, making cuts earlier than June inconsistent with the financial institution’s nicely telegraphed response operate, UniCredit added.
The difficulty for Lagarde and her Governing Council colleagues is that the ECB’s projections have usually been broad of the mark – most importantly in 2021, when the central financial institution didn’t anticipate the surge in inflation.
“Given the track record of the last few years, the central bank simply can’t afford to anticipate what might happen, it will have to wait until it happens,” ING economist Carsten Brzeski mentioned.
Influential ECB board member Isabel Schnabel set the tone final week, when she took additional rate of interest hikes off the desk given a “remarkable” fall in inflation.
Lagarde is anticipated to echo her argument that policymakers shouldn’t information for charges to stay regular by mid-2024, however as an alternative concentrate on financial knowledge.
“We expect a clear shift of tone to emerge, with data dependency of any upcoming decision even more stressed than in the past,” Natixis economist Dirk Schumacher mentioned.
Cash-market merchants are betting on a doable discount in borrowing prices as early as March and a slim majority of economists polled by Reuters suppose it can come by June.
BOND RALLY
These expectations have been introduced ahead since November’s weaker-than-expected inflation knowledge and Schnabel’s feedback to Reuters.
The following bond rally has eased financing circumstances, the other impact to the one the ECB has been making an attempt to attain through greater charges.
However there’s a silver lining. It ought to now be simpler for the ECB to determine on the way forward for its Pandemic Emergency Buy Programme.
This was attributable to run till the tip of subsequent yr however a number of policymakers have known as for an earlier exit given bond markets present no signal of pandemic-era stresses.
The ECB is prone to talk about whether or not to cease changing bonds that mature though it might defer a choice till early subsequent yr.
Anatoli Annenkov, an economist at Societe Generale (OTC:), mentioned the ECB could cap reinvestment at 10 billion euros ($10.8 billion) from March or April – down from 15-20 billion euros – with a view to ending purchases altogether by mid-year.
($1 = 0.9268 euros)
