Lagarde anticipates that the ECB will lower interest rates in June but the cuts will not be successive

Analysts and investors have beenand months really) trying to put a date on the start of the drops interest rates by the European Central Bank (ECB). But the unknown in the market is not only the when will monetary policy begin to relax in the eurozone (made up of the 20 countries that have the euro as their currency, Spain among them), but the What will that process be like?. Will the decreases in rates be followed (just as the ten increases between July 2022 and last September were successive)? According to the president of the institution, Christine Lagarde, the answer is negative.

“I said that today we have not talked about lowering rates,” Lagarde responded bluntly to the journalists present at Press conference from last day 7, after the last meeting of the Governing Council of the ECB. The media repeatedly asked about the possible date on which the organization will begin to make money cheaper, something that would reduce pressure on the euro zone economy (which ended last year stagnant). “No hurry, no hurry”, the president insisted then. However, we only had to wait one day for different members of the entity to begin to give their opinion on the matter.

At this point, it is important to remember the six quotes that the 26 heads of the European Central Bank they have scheduled between now and the end of the year:

• April 11.
• June 6th.
• July 18.
• September 12.
• October the 17th.
• December 12th.

“It is very likely that there will be a first rate cut in the spring,” declared the governor of the Bank of France (and member of the ECB Council), Francois Villeroy de Galhau, unapologetically on March 8, in an interview with BFM Business. Less than a week later, in another interview with The Figaroassured that the risk of waiting too long easing monetary policy (and unduly harming the economy) is now “at least equal” to acting too soon and letting inflation pick up.

“It has become clear that the risk that the rate cut is too premature has visibly decreased,” Olli Rehn also stated less than two weeks ago. The governor of the Bank of Finland referred to the fact that The ECB’s own economic forecasts, updated this month, show that average inflation will already be 2% in 2025.

Precisely that 2% (asymmetric in the medium term, more specifically) is the objective sought by the entity chaired by Lagarde, whose reason for being is to guarantee price stability in the euro. Depending on this, the levels of interest rates and other monetary policy tools (bond purchases, etc.) vary (or not).

Last month, the latest data available, the eurozone’s headline consumer price index (CPI) softened to 2.6% year-on-year. That is, it is only six tenths away from the ECB’s goal. That is why, in the opinion of Pierre Wunsch, of the Belgian central bank, they will have to risk it at some point. “We’ll have to say, okay, we think it’s going to work and We’re going to make a decision, and I don’t think it’s going to be, you know, before a long time.“he said a week ago, as reported by Bloomberg.

The first rate cut will (probably) be in June

However, and as has become usual within the ECB, discord is evident. “The discrepancies in the Governing Council are legitimate, they enrich the debate and, furthermore, until now they have been relatively limited,” argued the head of the Bank of Spain, Pablo Hernández de Cos, in an interview with The newspaper published last weekend. “In any case, I think the current level of consensus is very high and I hope it remains that way,” she added.

De Cos spoke those words after having said: “The normal thing is that we start the reduction of rates soon and June could be a good date to start it.” The BdE governor therefore positioned himself on the same side as his other colleagues, such as Klaas Knot, the Dutch representative at the ECB; Yannis Stournaras, the Greek, and even the organization’s chief economist, the Irishman Philip R. Lane.

Likewise, the vice president of the ECB, Luis de Guindos, is also committed to starting the rate cuts with the arrival of the summer season. “The evolution of salaries [en la eurozona] it’s key and the majority of salary negotiation agreements will have been concluded in the first months of this year. We will have more information in June,” he said in an interview with the Greek newspaper Naftemporikipublished yesterday (and which you can read here in English).

The former Spanish minister also assured that they have not yet spoken at the ECB about cuts. “We have to gather more information. In June we will also have our new forecasts [económicas] and we will be prepared to talk about it,” he justified. “We do not depend on the date, but on the data”he stressed.

And if this were not enough, the president of the ECB herself has once again pointed to June, although implicitly. The first time she did it was in January, at the Davos Forum, responding to a question about interest rate cuts could begin in the summer. “I would say it’s also probable,” the Frenchwoman dropped.

“We will know a little more in April and a lot more in June [sobre la evolución de la economía, inflación y salarios]”, he noted after the last meeting of the entity. And at an event in Frankfurt this Wednesday he maintained the message: “In the coming months, we will receive more data, which will help us assess whether we can trust enough in the path forward to move to the next phase of our monetary policy cycle.

“If these data [los del IPC y las alzas salariales que vayan saliendo a la luz] “reveal a sufficient degree of alignment between the path of core inflation and our projections, and assuming that the transmission remains strong, we will be able to move to the review phase of our monetary policy cycle and ease the restrictive stance,” he said.

There will be pauses on the way down

That was not really the most striking part of Christine Lagarde’s speech today, but what highlighted that, “even after the first rate cut,” the ECB cannot commit “in advance to a specific rate path.”

This means that, unlike what happened with the increases, the decreases will not be (or do not have to be) successive. Something that Martins Kazaks, governor of the Bank of Latvia, advanced at the beginning of the month: “We will not be forced to go on autopilot” once the cuts begin.

“The level of uncertainty is very high, which justifies that we should not be very explicit about the temporal pattern of the rates“, Pablo Hernández de Cos also said.

According to Lagarde, once the first drop in interest rates has been undertaken, there will be a period “in which it will be necessary to continually confirm that the new data supports” the ECB’s inflation projections. Therefore, it is to be expected that the central bank will take pauses in the downward path of the price of money once it begins, in principle, in June.

This vision coincides with that of the market. According to swaps indexed to one day collected by the consensus of Bloombergwhich serve to verify the forecasts of professional investors regarding ECB rates, there will only be three moves to make money cheaper throughout the five meetings of the ECB until the end of the year. In other words, the market contemplates two pauses in rate cuts.

Sayings swaps They also note that Lagarde’s side will certainly reduce rates in June. The probability is 80%, although it has been reduced in a short time: after the meeting of the central entity (on the 7th) the probability exceeded 90%.

All in all, these market estimates can be expected to vary in the coming days. And this afternoon the US Federal Reserve (Fed) will publish its dot plot (dot plot), in which its members anonymously show where they believe American rates will be in the short term. “We do not rule out that the dot plot tightens to show fewer rate cuts in 2024, only two compared to three targeted in December. The reason: (…) the strength seen in the latest inflation and employment data,” anticipates the Income Analysis Department 4 in its daily report.

“If the dot plot With only two cuts, the market would also need to adjust its expectations, which currently stand at three cuts by 2024, far from the seven cuts expected at the end of 2023,” they add. And from Bankinter they warn: “Today there may be a clash between what the Fed delivers and the market wants.” A disappointment that could also be seen in expectations about the ECB.