Anticipating the last ECB Meeting of 2023: What can we except ?
13 DEC, 2023
By Johanna Zidani from RankiaPro Europe
The European Central Bank holds its last meeting of the year today, and the question on everyone's mind is whether interest rates will remain unchanged or if there will be some last-minute surprises. In addition, the media is closely monitoring the speech of the president, Christine Lagarde, who will provide indications on the direction the ECB will take in the following year. Here are the experts' perspectives for this event:
Katharine Neiss, Chief European Economist at PGIM Fixed Income
In a context of weakening economic growth and rapidly declining inflation, markets are becoming convinced of the idea of an early and substantial interest rate cut in 2024. This trend has been particularly evident in expectations for ECB interest rates. The November flash estimate of Eurozone inflation was surprisingly weak, including underlying measures of internal inflation such as core inflation and services inflation. At this stage, we do not have detailed information on the factors underlying, for example, the weakness in services inflation, but we doubt that this is sufficient evidence to induce the ECB to cut rates so soon. That said, if the final inflation data - expected after the next ECB meeting - shows widespread weakening, along with other high-frequency indicators suggesting that the labor market, in particular, is rapidly cooling, then early and decisive rate cuts could be anticipated. However, our baseline scenario predicts that the Eurozone economy will move largely sideways, the labor market will soften but remain essentially resilient, and infrastructure spending will support the peripheral countries of the Eurozone. This outlook points to a peak adjustment in the latter part of 2024, so that the policy rate ends 2024 at 3.5%.
Konstantin Veit, Portfolio Manager at PIMCO
We anticipate that the ECB will keep benchmark rates unchanged at the December meeting. Currently, the market expects around six rate cuts for the next year, starting as early as March.
We remain skeptical that the ECB will cut rates as early as the market is pricing in, as prospects for underlying inflation remain uncertain. We do not expect the ECB to make radical changes to reinvestment guidance at the December meeting.
Currently, the ECB intends to reinvest the maturities from the Pandemic Emergency Purchase Programme (PEPP) at least until the end of 2024. While flexible reinvestments of the PEPP remain the first line of defense against fragmentation, the ECB is likely to aim for an early reduction in PEPP reinvestments.
Although the ECB may begin discussing changes to the current reinvestment strategy at the December meeting, we believe it is more likely that operational details will be communicated in the first quarter of next year, with a partial roll-off likely to commence in April next year.
While bond yields have risen in the last two weeks, fixed income still appears very attractive in historical terms. We prefer taking exposure to interest rates with maturities up to five years and favoring higher-quality segments of the credit universe."
Felix Feather, economist at abrdn
The ECB will not raise interest rates further at its Governing Council meeting this week because disinflation in the Eurozone has been faster than expected. However, it will not cut rates either. The most recent update from ECB experts' projections in September showed an average inflation of 3.3% in the fourth quarter. But two months into the quarter, we have seen figures of 2.9% and 2.4%. Therefore, it is likely that the ECB's inflation forecasts for 2024 will need to be revised downward. It is also probable that growth forecasts will be revised downward again following the 0.1% contraction in the third quarter.
Even before these downward surprises, most institution members seemed content with keeping rates at a level high enough for inflation to return to the target. Therefore, a rate hike will not be considered at this meeting. In fact, given the data, a cut seems a reasonable proposition. However, ECB officials have made it very clear that, for now, it is not planned. The ECB expects the "final stage" of disinflation to be challenging. In fact, inflation is likely to increase in December.
In the face of the unlikelihood of a change in interest rates, investors should pay attention to two events that could move markets. The first is a change in the reinvestment policy of the PEPP, which Isabel Schnabel has suggested will be on the agenda. The second is the market's resistance to a sharp rate-cut cycle in 2024 within the decision framework.
If the language regarding maintaining rates at current levels for a sufficiently long period softens, the ECB could be opening the door to cuts sooner than anticipated.
Raphael Olszyna-Marzys, International Economist at J. Safra Sarasin Sustainable AM
It is assumed that the ECB will maintain interest rates this week. New macroeconomic projections will be published, and those of the ECB will likely show weaker growth and lower inflation.
The major central banks are meeting for the last time this year. In general, central banks have become more moderate lately as inflation has surprised on the downside, and labor markets have cooled. Economic activity has stalled or contracted in Europe, and growth in the U.S. seems to have slowed considerably in the last quarter. Recent movements in fixed-income markets have also been quite volatile, suggesting a one-way path for official interest rates. The only remaining question is the timing and magnitude of the cuts. The market is betting that there is a high probability that central banks will begin easing their policies as early as March. We expect some (moderate) pushback, with central banks pointing to the rigidity of labor markets and the risk of declaring an early victory against inflation. But in the end, it will be the data that determines the central banks' policy stance and future actions.
We expect the ECB to keep official interest rates and guidance unchanged, characterize the progress in underlying inflation as encouraging, and assess inflation prospects as more benign. In fact, inflation in the Eurozone has fallen below expectations for three consecutive months, with a decline in overall inflation to 2.4% in November. Although recent activity surveys suggest that economic growth may have bottomed out, they still point to economic stagnation. This has led some members, particularly Schnabel, a member of the Executive Board, to take a more moderate stance. The new ECB projections are likely to show lower economic growth and inflation figures for 2023 and 2024 compared to September (Chart 1). However, the profile of a relatively fast recovery is likely to remain intact. President Lagarde is likely to emphasize that underlying inflation remains too high and that progress must continue to reduce wage inflation. Unfortunately, the Bank will not have more certainty about this until spring. Attention should be paid to the evolution of profit margins. In summary, President Lagarde will insist that it is too early to draw hasty conclusions.
Gilles Moëc, Chief Economist of AXA Investment Managers
The ECB does not have an equally simple communication tool at its disposal, and the big difference with the Fed is that the real economy in the Euro area is in a much worse state. We think Christine Lagarde will be able to use the new forecasts to signal that, while hikes are no longer on the table – even hawks such as Isabel Schnabel have given up on that option – it will take until 2025 to get inflation back to target, a prospect which does not warrant early cuts.
While the bond market in the US and Europe remains of course tuned to even minute change in the communication of the Fed and the ECB, potential moves by the Bank of Japan are getting increasingly relevant. The market is now considering that the BOJ meeting on 19 December could be “live”. We stick to our view that the BOJ will wait until April as it will want to tread carefully amid mixed domestic data while it needs to take on board the ramifications of tightening when the western central banks would be about to cut. Still, the BOJ is indeed preparing minds.
