The ECB meets Today. What can we expect?

This Thursday, April the 11th, the ECB meeting will take place. A meeting in which fund managers expect official interest rates to remain unchanged, but what they will be watching for is the update in growth, inflation forecasts and some communication about the pace of rate cuts since June.

As we wait for the meeting to arrive, we bring you the perspectives handled by professionals in the asset management industry.

Gilles Moëc, Chief Economist, AXA Investment Managers

No ECB decision is expected this week. Last month, Christine Lagarde had hinted at the possibility of action in June, but of course the Governing Council will have the opportunity this Thursday to report on an "interim assessment" of the macroeconomic situation in the euro area. The central bank's decision to revise downwards its inflation forecasts seems to be confirmed by the March CPI: disinflation continues at a faster pace than the market expected. However, the resilience of services prices remains a sore point. The message from surveys on the future behaviour of business prices and the still anaemic domestic demand are, however, reassuring in terms of the amount of inflationary pressures still looming. The European economy seems to be stabilising at a fast pace for the time being. It is true that the speed gained in nominal wages, which contrasts with the slowdown in headline inflation, will support purchasing power, but fiscal headwinds are building up before the impact of monetary tightening fades. We continue to believe that the ECB will not wait for inflation to fully converge to 2% and will cut in June, even if the Fed hesitates.

The possibility of a lag between the ECB and the Fed is now the market's baseline scenario. Although we maintain June also as the baseline scenario for the first Fed cut, it is undeniable that the data is less favourable for a monetary policy reversal in the US than in the Euro Zone. Job creation remains solid and its acceleration since the autumn of last year was confirmed again in the March payroll series. However, we note that wage growth has stabilised at a pace which, assuming current productivity gains are maintained, should be consistent with a return to 2% inflation. Strong supply conditions, driven in particular by large net immigration, are contributing to this. That the recent "Fed speak" has become remarkably cautious makes sense, but we continue to view as an extreme scenario the hints of [Minneapolis Fed president Neel] Kashkari last week of "no cut" in 2024. However, the ECB cutting before the Fed is entirely within our "plausibility range". We note that the euro exchange rate has barely softened despite the reversal of market expectations on policy rate differentials (still in early February the consensus was for more hikes by the Fed than the ECB). This should encourage the ECB to take the right decisions for the euro area, regardless of what the Fed eventually does.

Mauro Valle, Head of Fixed Income at Generali AM

In the last week the US Treasury widened to 4.40% (+20 bps). The real rates increased by 16 bps, while the BE rates increased around 5 bps. Really volatile week on rates starting with a selloff on Monday, bear steepening following mixed data in the US: PCE on Friday 29th March, ISM on Monday and JOLTS and factory orders on Tuesday alongside Powell on the tape on Friday and some reversal of the strong bid into quarter-end. 

We don’t have any particular concern on the Italian bonds, the movement has been driven by the speculations only. The portfolios confirmed the long relative duration exposures, with a close to neutral exposure for German bonds; Italian BTPs are always overweighted, together with Spain and Greece. 

During the second half of the week the curve flattened partially offsetting the previous movement. The bund rates ended the week at 2.40% (+5 bps), with slightly higher BE rates (2.12%) and 5Y5Y inflation expectations (2.3%). European data, namely inflation in Germany, falling further confirming the narrative from France, Spain and Italy. Volatile session in the middle of the week with some risk-off moves depicted by the widening in IK RX and BTS-DU as weakness affected rates market deficit headlines hit the tape. 10y btp/bund spread widened hitting 149 bps, but recovering the following days ending the week at 140 bps. 

The exposures on the yield curve is always long up to the 10 years maturities and underexposed to the long end. The portfolios will continue to implement a long relative duration strategy, waiting for a retracement of core rates around / below the 2.2% area. The BTPs exposure will be overweighted.

Felix Feather, economist at abrdn

The ECB is expected to hold interest rates at its meeting this week, despite falling inflation. Policymakers are concerned that the recent decline in headline inflation rates masks the persistence of underlying domestic inflation.

Experts will be watching for any signals regarding forward guidance. The Bank is likely to cut rates in June, but policy makers have so far refused to commit to doing so at that meeting. We expect several rate cuts this year, starting in June.

François Rimeu, senior strategist at La Française

No action in April, but the first rate cut is coming.

The ECB's Governing Council (GC) is not expected to change interest rates at this week's meeting. Most likely, ECB President Christine Lagarde will bring forward the rate cut announcement to June, while cautiously proceeding with monetary easing, especially given the improved macroeconomic outlook.

These are our expectations for this week's meeting:

• The European Central Bank (ECB) will again keep its official rates at 0% for the deposit rate, 0.25% for the REFI rate and 0.5% for the marginal lending facility.
• President Christine Lagarde will announce an interest rate cut in June, probably by 25 basis points, given her increased confidence of reaching the 2% inflation target.
• Lagarde will reiterate that monetary decisions remain data-dependent and meeting-by-meeting. As a result, we do not expect her to provide any guidance on how the ECB will cut interest rates after the first move.

Yasser Talbi, Portfolio Manager at Indosuez Wealth Management

Statuquo for rates in sight at Thursday's meeting. Recent inflation figures have reinforced expectations of a first decline in June.

April's European Central Bank (ECB) monetary policy meeting should come as no surprise. Since March and the latest update to growth and inflation forecasts, the market and several members of the Governing Council have indicated June as a good candidate for a first rate cut. Although Christine Lagarde did not commit to this reduction, the latest inflation figures should support the ECB in order to record this decline in June. 

With regard to Thursday's meeting, the ECB's speech should be in line with recent  communications with the probable objective that not to alter market expectations, which seem in line with the tone of the Governing Council if we refer to the publication of the last minutes. 

The subject of wages has been highlighted for several months now. The ECB wants to see an  improvement in this variable and forecasts that would indicate wage growth in line with the 2% inflation target. On this aspect, we should have more precise indications by the June meeting. Moreover, the June meeting will update the ECB's growth and inflation expectations. These two elements will allow a clearer communication on the pace of return to more neutral policy rates, but we will only have these details in June. 

The pace of rate cuts should be questioned at least during the press conference. We expect  the ECB to remain evasive and refrain from communicating more widely about the pace of decline. A meeting by meeting approach will be preferred, in line with the latest statements, and it is likely to maintain the consensus within the board. Any clarification on this point would be perceived as a surprise by the market. 

On the markets, European yields have outperformed US yields over the past 3 months, reflecting expectations of interest rate cuts in the Eurozone, which remain anchored at around 4 cuts this year. This discrepancy seems justified given the difference in growth and  inflation dynamics between the two regions. Our annual forecasts are in line with those of the market (4 rate cuts as of June).

Marco Giordano, Investment Director at Wellington Management 

What is driving the markets at the moment?

1. Rates on hold. With some notable exceptions, most central banks opted to keep rates unchanged over the course of March. The Fed considers the January and February inflation prints, both of which exceeded economists’ consensus estimates, as beginning of year noise. The FOMC intends to look through this and expects inflation to continue to move downward, with markets now pricing three cuts by the end of the year. Following market exuberance at the beginning of the month, Chair Powell and Governor Waller delivered more hawkish messages, reiterating that the US economy continues to be in robust shape and that rate cuts need careful consideration.  

The ECB and Bank of England also opted to keep rates unchanged, while the Bank of Japan exited negative rates (more on this below). On the flipside, the Swiss National Bank surprised markets with a 25bps rate cut as it became confident inflationary pressures have abated, causing the CHF to continue depreciating against other currencies. Over the course of the month, the Bank of Mexico became the latest central bank in Latin America to start their rate cutting cycle, and could follow Brazil, Chile and Colombia in reducing interest rates further. This could mean a reversal of fortunes for the Mexican Peso, one of the best-performing currencies in the world and a darling of FX markets in the last two years. 

2. Policy shift in Japan. In what was a widely anticipated move, the Bank of Japan (BoJ) announced on 19^th March that it would end its negative interest rate policy which has been in place since 2016, making a landmark shift away from its decades-long stimulus programme to combat deflation. The first rate hike in 17 years was voted by a majority 7-2 vote. The policy rate, previously at -0.1%, is now raised to a range target of 0-0.1%. While this is a small hike, unlikely to be followed by significant monetary tightening, it marks a very significant shift as the BoJ was the last major central bank still adopting negative interest rates.  

The BoJ also formally discontinued yield curve control while maintaining a flexible QE programme to ensure continuity and avoid a sharp adjustment up in yields, committing to monthly purchases of JPY6tr (approx. $40bn) of Japanese Government Bonds (JGBs). It will no longer purchase JGBs to target an upper bound of 1.0% on the 10yr point, and instead it will purchase at a pace that prevents “rapid rises” in yields. While these actions signal a departure from the prior leadership of Governor Haruhiko Kuroda and the initial bond market reaction was muted, the selloff in the JPY has continued and we saw a steepening of the Japanese yield curve. Having crossed the 150 mark, the Ministry of Finance and the Prime Minister have signaled that active currency intervention could take place to bolster the JPY. 

3. Economic data shows resilience. In the US we saw a notable improvement in the manufacturing ISM, demonstrating the positive reflex from easing financial conditions. Though we still expect real GDP to moderate, the recent improvement in the ISM reduces the downside growth risk at the margin. Should the Fed underdeliver on three cuts priced in for the rest of the year, this could once again tighten financial conditions. For this to happen, the Fed would have to see the labour market staying tighter for longer as sign that wages and services inflation are not coming down toward target. Inflation in the Euro Area has been moderating at a faster rate than the US and futures markets are now assigning a higher probability of a rate cut by the ECB than the Fed at their June policy meetings (a notable switch from last month). 

4. European periphery. Over the last few years, and particularly following the energy shock of 2022, German economic growth has lagged the rest of the Euro Area, but it has done so especially compared to periphery countries. 

This has been reflected in markets, where positive sentiment has driven demand for assets in these countries. Notably, we continue to see a tightening of spreads between Germany and Euro Area periphery. Greece has completed a series of reforms that have led it to regain investment grade status, while Spain and Italy have continued to outperform core countries, in no small part thanks to European Recovery Funds deployed to encourage economic growth post-Covid.