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ECB Preview: Hold Fast For Another Month

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The ECB Preview is generating significant anticipation ahead of the monetary policy meeting tomorrow. The market has grown increasingly antsy about when the shared central bank is going to finally move towards easing. While analysts aren’t saying outright that a rate cut is possible, a few are suggesting that it is an “opportunity” for the ECB to open the door for rate cuts in the future.

The consensus among economists, however, is that such speculative analysts will be disappointed. Fully two-thirds of economists don’t see a rate cut until at least June. The market, in the meantime, has been pricing in fewer and fewer rate cuts. Which means that the chances of a rate cut even at the May meeting are now less than 50%. That could end up smoothing over the market reaction to the ECB’s policy statement.

What Are the Expectations

The ECB’s Vice President, Luis de Guindos, likely summarized what can be expected from the ECB tomorrow, both in terms of the statement as well as the general theme of the post rate decision press conference: More data is needed before moving to easing. He made the comments just ahead of the blackout period, which is why they were seen as more significant.

That came close on the heels of ECB President Christine Largarde’s own comments in a similar vein. She said that the recent wage numbers from the fourth quarter were going in the right direction, but pointed out that the data from the first quarter would be very important for the ECB’s policy decision. That is an important clue about the timing of rate decisions, if the ECB will wait until it has those figures before pulling the trigger. Q1 wage data becomes available in May, opening the door for a rate cut in June at the earliest.

Time to Offer Hints?

Members of the ECB Governing Council have been remarkably unified over the last couple of months in pushing back on the notion that rate cuts are imminent. Even the doves who like to talk about rate cuts in the future have stressed that it isn’t the time, yet. A review of the comments of those who have mentioned rate hikes, shows any suggestions about timing as being in the second half of the year. So, even June might be slightly early, at least from the current perspective of the ECB members.

Of course from now until then there could be even more signs that inflation is coming down. Despite the shared economy narrowly skirting a technical recession, price growth has been coming down at a glacial pace. Though this is not entirely unexpected from the policymakers’ perspective, as the ECB has long predicted inflation won’t be back to target until next year. With the European economy not falling into recession, the ECB can afford to be patient in its fight against price increases.

Chances of a Surprise?

Keeping policy unchanged would be a surprise only to a relatively small section of the market, so the upside for the Euro for a hold is not all that much. The market is anticipating a rate cut, but hasn’t priced it in for this or the next meeting.

There is a chance that the ECB modifies the language in its statement in a way that’s interpreted as a sign that a rate cut could happen in May. That might be deliberate, or it might be traders reading what they want into the rhetoric. In either case, that could open more downside to the Euro if the market reverses course and starts pricing in more rate cuts for the year.

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