The ECB is only hesitantly pushing against market's rate cutting bets and emphasizes its data-dependent approach. Recent months have seen good progress on disinflation, which has sparked inflation optimism, but not all risks are cleared. Discussions on wage dynamics and their implications for core services inflation have taken centre stage. We do expect this to warrant a cautious approach by the ECB with the start of a gradual rate cutting cycle in June this year. While the market won't revert to high-for-longer, some more disillusion might be necessary to align with where the ECB is heading to.
Once again, the Fed kept key rates unchanged. Still, the first steps were taken to start a rate cutting cycle at one of the upcoming meetings. The Fed has gained confidence in the disinflation trend, yet the central bankers still want to see more confirming data. Chair Powell sees a rate cut at the next meeting in March as unlikely. So, the second quarter it is!
At first glance, the first ECB meeting of the year appears unspectacular. As expected, key rates remained unchanged and the balance sheet path was confirmed. What was striking, however, was that both the monetary policy statement and the following press conference failed to take a bold position against the market's rate cut bets. Instead, the data-driven approach was emphasized by the ECB. Yields and swap rates in the euro area fell markedly as a result.
The upcoming ECB meeting might seem comfortable for the ECB, as inflation develops broadly as expected, the terminal key rate levels have finally been reached and more clarity on the 2024 balance sheet path has already been created in December. On markets, however, the wind has turned quickly and the ECB got in the defensive of why not to cut key interest rates rather soon. Here are 5 things we expect for the upcoming ECB monetary policy meeting:
► Key rates will be kept unchanged and the ECB will push back against markets' rate cut bets to prevent a pre-emptive loosening but won't change its data dependent forward guidance.
► The ECB will be pleased with recent inflation numbers, which came in broadly as expected and even a touch below projections. Still, expect a word of caution on inflation.
► The ECB will take note of the fact that the euro area economy is performing weaker than expected. A recession is no surprise for most but was not part of the ECB's base case.
► After the surprise decision on PEPP in December, the ECB will confirm that its balance sheet reduction (QT) is on autopilot, which lowers uncertainty for markets
► Talks about the minimum reserve requirement ratio have abated, yet a 'normalisation' to 2% can come at any time, also at the upcoming meeting.
After years of crises, hopes for 2024 are somewhat clouded, not least due to the geopolitical circumstances. (Geo)politics and interest rate cuts are the buzzwords for the new year on the currency markets, with the former representing potential upward pressure for the safe havens CHF and USD. In Poland, local politics put pressure on the exchange rate. The Albanian lek remains strong backed by fundamentals. Finally, while the rouble showed its stable side recently, supported by several factors, the NBU had to break a devaluation trend.
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