Synopsis:
Danske expects the ECB to deliver a 25bp rate cut this week, bringing the policy rate to 2.5%. However, the key focus will be whether the ECB softens its stance on monetary policy restrictiveness amid growing internal divisions within the Governing Council (GC).
Key Expectations from the ECB Meeting:
1️⃣ Rate Cut Decision Straightforward ✅
- ECB will cut by 25bp, reducing rates by 150bp from their peak last year.
- Markets have already priced in this move, but forward guidance will be key.
2️⃣ Divergence Emerging Among ECB Members 🤔
- Some policymakers argue that monetary policy remains restrictive, while others suggest that further easing is necessary.
- This meeting could signal whether the ECB is shifting towards a less restrictive stance.
3️⃣ Updated ECB Staff Projections 📊
- Headline inflation forecast to be revised higher to 2.3% in 2024 (vs. 2.1% in December) due to higher energy prices.
- Core inflation likely revised lower to 2.2% in 2025 (vs. 2.3% in December), reflecting weaker demand dynamics.
- GDP forecast to be revised slightly lower to 1.0% in 2025, reflecting a weaker growth overhang from 2024.
4️⃣ Rate Cut Expectations Beyond March 📉
- Markets are pricing in another 59bps of cuts this year, but Danske sees room for deeper cuts, with a terminal rate of 1.5% by H2 2025.
- Risks remain slightly skewed to the upside, meaning the ECB could pause rate cuts earlier if inflation surprises to the upside.
Conclusion:
Danske expects a 25bp rate cut this week, but the focus will shift to ECB communication on future cuts. The growing divergence within the ECB could lead to uncertainty over the pace of further easing. However, Danske still expects the ECB to continue cutting rates toward a 1.5% terminal rate in H2 2025.
