- The final ECB rate-setting meeting for 2023 could hold surprises
- Market looks for rate-cut hints; extra focus on projections and overall rhetoric
- Decision will be announced on Thursday 12.15 GMT, press conference at 12:45 GMT
Is President Lagarde ready for a dovish tilt?
This week is shaping up to be a cracking one as the final ECB meeting for 2023 will be held on Thursday, a day after the respective Fed gathering. Armed with the latest projections and, following two days of intense discussions at the Frankfurt tower, the ECB is expected to keep its interest rates unchanged, but it could give strong hints about its 2024 strategy.
Going into the meeting, inflation continues to decelerate significantly. The preliminary report for the month of November for the euro area surprised on the downside with both the headline and core components dropping to 2.4% and 3.6% year-on-year respectively. While the former has been expected to ease considerably due to the weaker oil prices, the latter’s move caught some ECB officials by surprise.
Similar to other central banks, core inflation has been creating headaches during the second half of 2023. President Lagarde has not been extremely vocal about core inflation, understandably as the ECB’s remit refers to the headline figure. However, the recent weaker core inflation prints have forced a turn from the ECB hawks and, in a sense, have put the final nail in the coffin of rate hikes.
Projections are a very important piece of the puzzle
Having said that, is the ECB ready to signal that rate cuts are around the corner? The scheduled ECB staff projections, which will be released after the meeting, will probably play a key role. At the September edition, the inflation projection for 2025 was 2.1%. A downgrade of this figure, just below the 2% “threshold”, and an equally low CPI projection for 2026 would cement the ECB’s current stance, meaning that it is currently in a comfortable position to meet its 2% inflation target by 2025.
However, a 2025 projection dangerously close to 1.5% would not go down lightly. The market is expected to pick upon this figure in order to justify its aggressive easing expectations as the first 25bps rate cut is now priced in for the April meeting with an extra 110bps expected during 2024. As a comparison, the Fed is expected to ease monetary policy by only 110bps in 2024.
Some positive signs in the growth outlook
The market appears to be ignoring some bright spots in the forward-looking growth indicators. The latest PMIs and IFO surveys appear to have bottomed out. With Germany most likely contracting in 2023, the hawks could pin their hopes for a better start to 2024, especially following the latest positive news from China.
However, the latest figures show a negative annual growth rate for loans to non-financial corporations, with the full brunt of the 10 consecutive rate moves not yet fully felt by the system.
Putting everything together, the ECB is expected to remain balanced with a high risk of appearing a touch more dovish. An improbable announcement about an earlier stop in the reinvestment of PEPP principal payments could confuse the market but it might be largely ignored.
President Lagarde will be able to see the market reaction after the statement is released, potentially allowing her to rein in the market’s expectations during the press conference and Q&A session.
Euro is trying to find its footing against the pound
Euro’s hard-earned gains against the pound since late August have mostly evaporated. Seven straight red candles have pushed the euro-pound pair to new 3-month low, with the main reason most likely being the aggressive easing expectations built up for the ECB.
Focusing on this week, the performance of the euro-pound pair depends on the dovishness expressed at the ECB gathering. Should the ECB defy the dovish expectations, we could see a move towards the 0.8635 area. On the flip side, a truly dovish show on Thursday could open the door for a retest of the 2023 low at 0.8492.
