FRANKFURT (Reuters) – The European Central Bank will keep interest rates unchanged at a record high on Thursday and is likely to push back on investor bets for aggressive policy easing this spring, despite recession risks and a rapid slowdown in inflation.
The ECB ended its quickest rate hiking cycle in September but has been adamant that even discussing a reversal would be premature, since price pressures have yet to be fully extinguished and crucial wage talks remain ongoing.
Investors, however, are betting that the ECB is getting it wrong on both growth and inflation, and will be forced to make an about-face sooner rather than later.
Such a pivot will not be on the agenda for now, especially after the central bank rolled out its top brass last week to convince markets that a long plateau in rates was ahead.
ECB President Christine Lagarde is likely to argue that underlying price pressures are still strong, particularly for services, while risks remain abundant – from pending wage deals to geopolitical tensions, including the Red Sea blockade.
Lagarde and chief economist Philip Lane have repeatedly pointed to first-quarter wage settlements, for which figures become available in May, as a relevant gauge. That has been seen by some as a clue that a first rate cut could come at the ECB’s June meeting.
“Pushback on market pricing is likely to be strong, with Lagarde indicating that the early and fast cuts priced by the market are not necessarily consistent with inflation going back to target,” Bank of America said.
“We would expect Lagarde to reiterate her line at Davos that we are at the peak for rates and that cuts around the summer could make sense.”
Financial markets now see 130 basis points of rate cuts this year, with the first move in April or June, a big change compared to two weeks ago when 150 basis points of reductions were seen, starting in March or April.
The ECB will announce its policy decision at 1315 GMT, followed by Lagarde’s 1345 GMT news conference.
RECESSION
The big discrepancy in expectations largely stems from a different outlook on growth and just how much rate hikes are slowing the economy of the 20-country currency bloc.
The ECB expects household and government spending to drive a recovery but data appear to be painting a bleaker picture.
The euro zone was probably in recession last quarter and got off to a slow start in January, making the current period the sixth straight quarter with broadly flat or negative growth.
A weak economy, along with muted commodity prices and high interest rates, will keep pushing down inflation, which last stood at 2.9% and was not expected by the ECB to fall back to its 2% target until 2025.
“We continue to expect headline and core HICP inflation rates to fall to 2% already before the middle of this year, a year or more earlier than the ECB forecasts,” Deutsche Bank economists said.
This inflation drop will mean rising real interest rates, an effective policy tightening in a recessionary environment.
“This would raise the risk of an outright recession and a genuine shock to the labour market,” Deutsche Bank added.
It was not alone in fearing that the ECB’s insistence on overwhelming evidence of disinflation risked increasing the chance of a policy error.
“Having overlooked the negative impact of monetary tightening on growth until now, the ECB remains biased towards cutting too little, too late,” TS Lombard’s Davide Oneglia said.
“The ECB has less to worry about inflation and fewer excuses to keep monetary policy tight than officials think, but over-tightening habits die hard,” Oneglia added.
Source: Economy - investing.com
