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It indeed seems to be a busy week for central banks, with several major ones scheduled to report on their monetary policy decisions. The Federal Reserve (Fed) is set to lead the way with its two-day meeting starting on Wednesday, followed by the European Central Bank (ECB), Bank of England (BoE), Swiss National Bank (SNB), and Norges Bank (Norway) on Thursday.
The consensus among analysts is that these central banks are likely to keep their interest rates unchanged at their current levels. This aligns with the ongoing trend in monetary policy, where central banks have generally been cautious about making significant changes amid uncertainties in global economic conditions. The decisions and statements from these central banks will be closely watched by investors and analysts for insights into their views on inflation, economic growth, and potential policy adjustments in the future.
The markets are currently indicating a 96% probability of no change in the European Central Bank’s (ECB) meeting on Thursday, according to Reuters data. Notably, the remaining 4% is not assigned to a potential hike but to a 25 basis points rate cut. While it appears highly unlikely for a rate cut at this meeting, the fact that markets are considering it as a possibility reflects a more dovish sentiment towards the ECB.
Recent data from the Eurozone indicates that the economy is slowing at a faster pace compared to the United States. Additionally, while growth in the Eurozone remains comparable to the UK, inflation is much lower at 2.4%, leading markets to anticipate a higher chance of the ECB being the first among major central banks to cut rates. Current predictions point to April for the first 25 basis points cut, as per data from Reuters.
During Thursday’s meeting, market attention is likely to focus on ECB President Christine Lagarde and whether she acknowledges the faster-than-anticipated drop in inflation and how it aligns with the central bank’s rate forecasts. A more dovish tone from the ECB could boost equities, but any mention of rate cuts might put further downward pressure on the EUR against the USD and GBP. While EUR/USD has found some support from recent sell-offs, the path of least resistance could turn lower if markets continue to price in a dovish stance from the ECB.
SocGen
The ECB is unlikely to signal any major policy changes in the near term. However, we would not rule out agreement on an earlier end to full PEPP reinvestments. The balance sheet remains too large, and it seems as good a time as any to pre-announce PEPP tapering as of March/April. We expect broadly neutral language, acknowledging the progress made on inflation but warning about calling a victory just yet. New forecasts should show inflation close to the target in 2025, opening the way for rate cuts in 2H24. Still, wage and productivity trends remain a concern and pose an upside risk to core inflation next year.
Wells Fargo
Our forecast is for the ECB to hold its Deposit Rate at 4.00%. While there is no change expected for the ECB benchmark interest rates, there will still be plenty for market participants to focus on. Eurozone growth and inflation have softened noticeably in recent months, including a decline in Q3 GDP and a sharp slowdown in November inflation. Amid this backdrop, there will be significant interest in the ECB’s updated economic projections and, in particular, whether the medium-term CPI forecasts for 2025 drop to (or perceptibly below) the 2% inflation target. So far, ECB policymakers have signaled it is still too early to consider rate cuts. For now, we anticipate an initial ECB rate cut will occur in June 2024. However, a sharp markdown in the ECB’s forecasts, along with a softening in the ECB’s language, could increase the chances of an initial interest rate reduction coming as soon as the ECB’s April monetary policy meeting.
