ECB Keeps Rejecting Rate Cut Calls Despite Faltering EU Economy, But They’ll Budge

The Eurozone economy has been hit hard by surging prices and higher interest rates by the ECB, which make financing conditions tighter, hurting the economy even more. Inflation has fallen worldwide and the FED has announced that they will start cutting rates, so markets are looking at the ECB to do the same, however, the European Central Bank keeps rejecting such calls repeatedly, although they will fold their hand sooner rather than later, with the German economy heading into a recession.

Yesterday, we saw the results from the last ECB’s Survey of Professional Forecasters (SPF), which showed expectations of inflation falling further, as well as further slowing in the Eurozone economy for 2024 and 2025. While participants expect prices to fall further, they also anticipate a more muted economic picture. This comes particularly from the declining demand from the European consumer, as well as prospects of a slowdown in the labor market. The Eurozone economy fell flat at 0.0% in Q4 last year, while for Q1 of 2024, there is little to no improvement projected. EUR/USD has been holding up only due to ECB comments, while the economy keeps weakening. Below are the inflation and GDP estimates:

2024 ECB SPF Projections:

• Inflation: 2.4% (revised from 2.7%)
• GDP Growth: 0.6% (revised from 0.9%)

2025 ECB SPF Projections:

• Inflation: 2.0% (revised from 2.1%)
• GDP Growth: 1.3% (revised from 1.5%)

The Bundesbank was also pessimistic in its monthly report, saying that Germany might stagnate in Q1. The eurozone economy remains stagnant, with no signs of a substantial comeback, unlike in the US where we keep seeing positive data.

• The German economy will stagnate at best in the current quarter.
• External demand is poor, and increasing borrowing rates have dampened investments.
• Consumers remain cautious in their spending behavior.
• Inflation could decelerate significantly at the start of the year, mostly due to base effects.

However, the ECB is totally against any idea of policy easing taking place soon, or so they try to appear. Yesterday we had a number of ECB members repeating the same mantra over and over again as if they’re under a spell. But, the tougher they try to look, the harder they will fall when they finally decide to start cutting interest rates.

• It is possible to cut rates later but with bigger steps
• Personally prefer 25 bps rate cuts to begin with though
• Economy is more in a stagnation phase rather than recession
• The overall picture is good at the moment

• Interest rates should start to go down
• But ECB is in no rush to begin the process for now
• Cutting rates too early would be by all means worse than waiting just a bit
• There’s the risk that inflation starts to come back and then one would need to raise rates much more

• There was no dovish tilt on Thursday
• I am confident that the data will not support a rate cut in March
• Rate cuts will be more likely as the year progresses
• We are still less optimistic than markets are on rate cuts at the moment

The ECB is only mentioning March, so they are leaving April open, and that’s intentional. The likelihood of a rate cut in April is currently over 91%, making it the most important month to monitor in the comments.