Recent figures have bolstered market expectations for rate reductions starting in June, with the economist consensus pointing to an imminent easing cycle.
"We will know a little more in April, but we will know a lot more in June," Christine Lagarde, President of the European Central Bank (ECB), left us hanging in March, not giving much room for speculation on imminent interest rate cuts in the eurozone.
This week, the ECB convenes again on Thursday. No change in interest rates is anticipated, yet Lagarde will be called upon to clarify what "little more" we have actually learned about inflation and the rate outlook, and whether she will finally hint at a June rate cut.
Since the March meeting, data has reinforced market expectations for the imminent start of a rate-cut cycle by Frankfurt. Money markets are currently pricing in a nearly certain cut for June, about 90 basis points of cuts by December, and 150 by September next year.
The consensus among experts also broadly agrees on a first rate cut in June, anticipating clear communication from the ECB at the April meeting.
What can we expect at the ECB's April meeting?
"Given the broadly weaker economic outlook for some of the larger economies, we expect the ECB will provide more confidence of a June 6th rate cut at the April meeting," said Jennifer Lee, senior economist at BMO Economics.
ING's FX strategist, Francesco Pesole, noted: "Our base case is that the ECB will signal it is ready to lower rates in June, reinforcing market expectations on monetary easing this year. However, for markets, how the ECB communicates its plans beyond June may be more pertinent.
March's inflation drop exceeded consensus expectations, with the headline index at 2.4% annually and the core component at 2.9%. These figures strongly support the prospect of an initial rate cut by the ECB in June. The ongoing disinflation process did not slow down even with the Easter holiday effect, stated Banca IMI.
ABN Amro maintains that disinflation in the eurozone remains on track, expecting inflation to broadly stabilise at 2% by mid-year. Coupled with an anticipated decline in wage growth, this should pave the way for the ECB to begin lowering rates from June.
Eric Vanraes, head of Fixed Income at Eric Sturdza Investments, commented: "The ECB can't wait for the Fed," expecting almost a promise of a first interest rate cut on 6 June. "Time is running out for the eurozone; its growth is not as robust as the US, to put it mildly, and inflation is dropping more rapidly than across the Atlantic," he added.
Market News (MNI) offered a different view, noting that since markets have already factored in the ECB's June signal and no significant data changes since March, there is little reason to adjust the existing language.
Data dependence and a meeting-by-meeting approach is likely to feature prominently during the press conference, reflecting cautiousness among some, like Bank of America, against prematurely communicating rate cuts. "We do not think the ECB is ready to signal something in the written statement," economist Ruben Segura-Cayuela remarked.
Expectations are set for no hints next week on the potential speed and endpoint of the cutting cycle. "We would expect Lagarde to be explicit during the press conference and tell us that, while they've grown a bit more confident on getting there, more is needed for them to be sufficiently confident to cut," Bank of America wrote.
