ECB Preview: With Rates Unchanged, All Eyes Will Be On Signals About Future Rate Cuts

Absent some major shock, the ECB is set to keep rates unchanged for a fourth meeting on Thursday, with analysts unanimously predict the deposit rate will be held at a record 4%. Like her US counterparts, ECB chief Christine Lagarde is in no hurry to begin loosening monetary policy. Traders are now bracing for the likelihood of the first quarter-point rate cut to be delivered either in June or July, while also expecting a total of at least three such reductions this year.

As Bloomberg's Ven Ram writes in his ECB preview, the risk-reward equation is asymmetrically skewed toward a tactical rally in euro-area bonds after today’s ECB meeting; he adds that of key interest to investors will be whether the ECB tweaks its statement to signal an upcoming interest rate cut and what it does with its macroeconomic projections.

With the ECB having well telegraphed its intent on the likely date for a first policy loosening, the market’s central assumption is that June is when it will occur. So the question is whether the ECB will prepare the ground for that formally by altering its guidance. Any tweak will be reflected here:

“Based on its current assessment, the Governing Council considers that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal. The Governing Council’s future decisions will ensure that its policy rates will be set at sufficiently restrictive levels for as long as necessary.”

The ECB may modify it to something along the lines of:

“Based on its current assessment, the Governing Council considers that the key ECB interest rates needn’t be as restrictive as they are now going forward, with the timing of any rate cut dependent on incoming data, particularly on wage inflation.”

The big question, though, is whether it chooses to introduce that language this month or at its meeting next month.

The ECB will also tell us how it thinks the macroeconomy is evolving, and it’s virtually assured that the ECB will lower its inflation forecasts for this year from 2.7% amid the rapid deceleration in price pressures. Bloomberg Economics estimates that the growth forecast for this year will be cut to 0.6% from 0.8%.

Earlier this week, Ram wrote that in his view, the next 25-basis point move in German front-end yields is lower, given that the market is fully braced for a policy reduction in June rather than in April. Since then, the two-year yield has declined about five basis points, and it is hard to see the ECB upsetting that calculus today.

Finally, as is customary, here is the ING Economics market scenario analysis.