Growth concerns cloud ECB’s move to normalise policy
The European Central Bank (ECB) is expected to take another significant step in normalizing its monetary policy stance at its upcoming March 7th meeting.
March Meeting to Mark Shift Towards Neutral Policy
While recent economic data has been relatively resilient, concerns about growth and the inflation outlook persist, leaving the timing and pace of potential rate cuts still uncertain.
At next week's gathering, the European Central Bank (ECB) is poised to move from its current restrictive policy stance towards a more neutral position. The new staff projections are anticipated to revise down growth forecasts for 2024 but leave the 2025 and 2026 outlooks broadly unchanged. Critically, inflation for 2025 is projected to be revised down to the 2% target.
Rate Cut Timing Hinges on Wage and Inflation Developments
While the new projections may not definitively rule out rate cuts at a particular meeting, market consensus remains that the first 25 basis point reduction will occur at the June meeting rather than April. Recent economic data has not been judged weak enough yet to bring forward easier policy.
The ECB has repeatedly stated it wants to ensure inflation returns sustainably to the 2% target over the medium term before cutting rates. As such, the path of wage growth will be closely monitored given its pivotal role in the inflation outlook.
Market Repricing but Muted Reaction Expected
Throughout February, markets repriced policy easing expectations significantly. They now anticipate around 87 basis points (bps) of ECB rate cuts for 2024, with 82bps coming in the second half of the year after an initial 25bps move in June. This repricing brings market expectations more in line with the ECB's own outlook.
Despite the recent adjustment in rate forecasts, a muted market reaction is anticipated following next week's meeting, as current pricing is seen as relatively well-aligned with ECB communications.
Better macro data helps to calm nerves
Recent macro data has afforded the ECB some breathing room ahead of kicking off rate cuts. While economic growth is stagnating, the region is not facing an outright contraction. Moreover, inflation expectations remain anchored and employment increased during Q4 2023.
The ECB will be weighing these resilient factors against persistent underlying inflationary pressures stemming from the tight labour market and the uncertainty around how wage gains will ultimately pass through to consumer prices.
This information has been prepared by IG, a trading name of IG Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.
Be ready to act on ECB opportunities
Learn how the ECB’s monetary policy announcements affect interest rates and price stability ahead of its next meeting in 12 December 2024.
- How might the next meeting affect the markets?
- What are the key rate decisions to watch?
- Why is the Governing Council announcement important for traders?
Live prices on most popular markets
- Forex
- Shares
- Indices
Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.
