ECB paving the way for rate cuts but denting speculations of swift action

In Short

No change in rates but PEPP QT to start in mid-2024: At today’s meeting the GC unsurprisingly decided to again leave key rates unchanged, the deposit rate at 4.00% and the repo rate at 4.50%. It continues with APP non-reinvestments but announced that it “intends to reduce the PEPP portfolio by €7.5 billion per month on average” over the second half of 2024 and to fully stop reinvestments at the end of 2024.

Highlights:

  • At today’s meeting the ECB’s Governing Council (GC) left its key rates unchanged, in line with expectations. How-ever, it decided to phase out full PEPP reinvestments over H2 2024 and adopted a less hawkish stance.  
  • The updated staff projections lowered the near-term growth and inflation outlook. Headline inflation is expected to come back to target in 2025 and fall to 1.9% by 2026 while underlying inflation is seen as more stubborn averaging still 2.1% by 2026. Growth is expected to gain traction in 2024 again.  
  • The GC adopted a more balanced tone and no longer sees inflation as “too high for too long” but only domestic price pressure to “remain elevated”. In the Q&A President Lagarde made clear that incoming wage data over the course of H1/24 will be of high importance.
  • The GC decided to advance the end of full PEPP reinvestments as it “intends to reduce the PEPP portfolio by €7.5 billion per month on average” in H2/2024 and to fully stop these reinvestments at the end of 2024. The key reason provided was balance sheet normalisation, but we also sense confidence that PEPP reinvestments as a first line of defence to fight financial fragmentation will not be needed. 
  • All in all we got clear signals that the ECB is about to pivot in 2024 but Lagarde tried to dent speculations about swift rate cuts. We still deem a first rate cut by June 2024 most likely.  

     

Download the full publication below

ECB paving the way for rate cuts but denting speculations of swift action

The latest views, research and investment insights from the experts of our ecosystem



Picture

© Generali Investments, all rights reserved. This website is provided by Generali Investments and is considered as a marketing communication and financial promotion related to the products and services of the following companies belonging to the Generali group: Generali Investments Partners S.p.A. Società di gestione del risparmio, Generali Insurance Asset Management S.p.A. Società di gestione del risparmio, Generali Investments Luxembourg S.A. and Generali Investments Holding S.p.A. (hereinafter jointly, Generali Investments). Moreover, the website may contain marketing communication and financial promotion of products and services of companies part of the multi-boutique platform coordinated by Generali Investments Partners S.p.A. Società di gestione del risparmio, and in particular of Infranity, Sycomore Asset Management, Aperture Investors LLC., Plenisfer Investments SGR, Lumyna Investments, Sosteneo Infrastructure Partners SGR, Axis Retail Partners S.p.A. and Generali Real Estate S.p.A. Società di Gestione del Risparmio