It is unlikely that the European Central Bank (ECB) will cut interest rates in its upcoming Thursday meeting. However, investors are seeking reassurance that a cut in the rate in June is a likely prospect. An increased wage growth, driving inflation in the service sector – now the most unmovable part of the scenario – is a potential obstacle.
Key indicators that the ECB policymakers are focusing on are forthcoming wage data from the first quarter, set to be announced in late-May. These will serve as a crucial factor influencing the rate decision in June. There was a decrease in employee remuneration to 4.6 per cent in the fourth quarter, a dip from 5.1 per cent from the preceding three months, yet, this is still considerably above the 3 per cent that Frankfurt deems congruous with its 2 per cent inflation target.
Lacking clear guidance about the timing and scale of rate alterations, market analysts must interpret and evaluate ECB chief Christine Lagarde’s remarks following the announcement of the rate. If she concedes that discussion regarding rate reduction is ongoing as a response to additional evidence of disinflation, this will be seen as an indication that a cut in rate is probable at the subsequent meeting in June, as suggested by Matthew Ryan from Ebury, a financial services company.
According to Ryan, “Lagarde’s task in this week’s meeting is to craft a carefully balanced message. We speculate that she’ll affirm the bank’s growing confidence in inflation aligning with the target, reiterating that more data will be available in June. We believe she’ll hint that preliminary discussions concerning lower rates were initiated this week, which should signal to the market that a cut is highly likely at the forthcoming meeting”, he added.
The market forecast is for Frankfurt to cautiously initiate a series of rate cuts in the latter half of 2024; a cautious two, three or maybe even four cuts, totalling a one per cent reduction in rates by the year’s end.