ECB Interest Rate Prep

Sentiment:

BofA: We expect the ECB to cut policy rates by 25bp, the first of eight cuts (200bp in total) in 2024/25, we think. Guidance probably won’t change much: a meeting by meeting approach, with a soft signal to a Sep cut, data permitting. Small forecast revisions higher to 2024/25 are likely, but 2% core inflation in 2026 should stay, leaving guidance intact.

ING: In rates markets, a cut by the European Central Bank on Thursday is already fully baked into the curve, with forward pricing nearly 25bp. But it’s the outlook beyond June that is still open, despite communication from officials having started to move out the curve. A back-to-back cut in July is deemed unlikely, with markets attaching only a roughly 10% chance to that scenario. A second cut is almost fully priced by October, but it’s a third cut this year that is hanging in the balance.

Goldman Sachs: Our economists expect the ECB to cut interest rates this week. We look at European equities’ performance around interest rate cuts. Given the limited history of the ECB, we also use different proxies such as the Fed, the Bundesbank and short-end yields.

Morgan Stanley: To sum up, the picture for the ECB at the beginning of its rate cutting cycle and after 5 months of 2024 data is a mixed one. Rate setters keep being surprised by near- term inflation developments. In particular, services inflation has proved more sticky than forecasted. The recent uptick of core inflation to 2.9% is a reason for concern. Negotiated wages will remain in focus; the second quarter figure, released on 23 August, may come out even stronger than the first quarter. All of this calls for a very cautious approach to rate cuts. With that backdrop, we have a hard time seeing the ECB cutting outside its quarterly projection meetings.

UniCredit: The ECB is to cut rates and offer no clear guidance. Prior to the CPI release, several ECB Governing Council members reiterated their support for a June rate cut, but hawkish members cautioned against back-to-back cuts.

Wells Fargo: We believe the European Central Bank (ECB) will lower policy rates at its June meeting as inflation trends lower and growth prospects remain subdued. In our view, an ECB rate cut in June has been well-telegraphed by policymakers, and we believe the ECB will in fact deliver a 25 bps cut. At the same time, we believe policymakers will try to express a degree of hawkishness and caution when providing forward guidance on the possibility of additional future rate cuts. With the ECB lowering policy rates ahead of the Fed, the possibility of currency depreciation could contribute to renewed inflation pressures, a dynamic we believe policymakers will want to avoid. Expressing caution and data dependency can be used as a tool to prevent outsized euro depreciation from the ECB cutting ahead of the Fed.

CBA: We expect the ECB to cut their central bank rate by 25bps this evening.

CACIB: Ahead of today’s ECB meeting, we and the markets expect that the Governing Council will deliver a 25bp rate cut. We further think that the ECB will signal that further easing could be needed in view of its unchanged forecasts for subsiding inflation and continuing albeit very anaemic economic recovery. The ECB’s forward guidance would thus be consistent with our expectation of three policy rate cuts this year but could be perceived as dovish relative to the current market rate expectations. We further believe that the Governing Council would be more comfortable to telegraph its dovish bias now that the EUR/USD outlook has stabilised. A dovish cut by the ECB today could trigger a renewed dip of the EUR-USD rate spread.

Money Market Pricing:
May 31st: Euro zone money markets price in less than 55 bps of rate cuts in 2024 from around 57 bps before inflation data.
May 23rd: Money Markets scale back bets on ECB rate cuts & price in around 60 bps from 67 bps before Wednesday’s UK inflation data.

ING Cheat Sheet: