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.  

     

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

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