ECB preview: A political rate cut in June, and no cut in September

On Thursday 6 June, the ECB is widely expected to deliver a 25bp rate cut, largely because the governing council members have stated as much. The updated June staff projection is expected to suggest that the prevailing economic and monetary policy narrative stays broadly unchanged and we expect the rate cut to be formulated as a rollback of the ‘insurance hike’ from September last year. We expect the ECB to repeat the meeting-by-meeting and data-dependent approach to the policy rate path beyond June.

We have revised our ECB rate path for the first time in more than 12 months and now expect the ECB to deliver two rate cuts this year (June and December), and three cuts next year. This will bring the deposit rate at 2.75% by the end of 2025.

Markets have already repriced the ECB expectations for this year and points to 61bp cut this year.

New ECB call reflects a stronger start to 2024 and sticky inflation

The incoming inflation since the start of the year has been stronger than anticipated, mainly due to the service sector. In addition, most recent indicators suggest that the worst is over in the manufacturing sector, where for example the order-inventory balance in May increased to a two-year high. Overall, we find the resilience of the European economy noticeable, which is reflected in the labour market strength being historically tight with the number of people employed growing by 0.3% q/q in Q1 24.

The new round of staff projections is expected to largely show cosmetic changes, and thus not warranting a change to the narrative. With economic data for Q1 better than expected, we expect a minor lift to the growth profile this year. Inflation is expected to show mechanical changes, reflecting the technical assumptions. However, we will closely monitor the wage growth assumptions that feed into this projection round, where we note clear upside risk. A recent ECB blog indicated that 4.1% negotiated wage growth for 2024 was assumed at previous meetings, compared with the Q1 24 data release of 4.7%. In terms of the technical assumptions change since the 24 March cut-off date, we see most indicators as broadly unchanged, except the ECB front-end pricing. End-2024 ECB pricing: +47bp, effective exchange rate: +1.2%, Brent (in EUR): -0.7%, 10y nominal GDP weighted yield: +15bp, 10y real GDP weighted yield: +10bp.

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