AXA IM: ECB will cut its rate by 25 bps this Thursday

AXA IM: ECB will cut its rate by 25 bps this Thursday

June 3, 2024

ECB
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'We think the ECB will cut by 25 bps this Thursday but will remain vague on the path ahead, although we believe the ECB, unlike the Fed, could well afford to provide some forward guidance,' writes AXA Group Chief Economist and Head of AXA IM Research Gilles Moëc.

According to Moëc, full data dependence, as currently exhibited by the ECB, should be reserved for specific situations: when inflation expectations become unanchored, when fiscal policy contradicts monetary efforts, when external shocks or internal defects affect monetary transmission, and when doubts arise about the neutral interest rate. Moëc notes that three of these conditions currently apply to the United States, with the exception being the de-anchoring of inflation expectations. However, none of these conditions align with the Euro area's current situation.

Moëc says that:

'Accordingly, we not only think the ECB can easily 'take the plunge' and cut this week despite a more complicated dataflow recently, but also that it could afford to be fairly transparent on its future trajectory beyond the rate cut for this week which they have already telegraphed, both hawks and doves.

If there is enough confidence to cut in June, there should also be enough confidence in how monetary policy is operating and, of course conditional on the absence of surprises, the Governing Council could tell roughly where they would be heading to for the remainder of the year.

This would have the benefit of anchoring expectations on a European market which has to deal with volatility in the US and nailing the point home about the ECB’s capacity to decouple from the Fed on a lasting basis. Yet, since our job is to predict what the central bank will do and not what we think they should do, we think they will avoid this approach and remain on Thursday very vague on the next steps after delivering their first 25 bps cut.'

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