MUFG: ECB arriving at the well-signposted rate cut

MUFG: ECB arriving at the well-signposted rate cut

June 3, 2024

Interest Rates ECB
ECB (07)

The ECB has all but pre-committed to an interest rate cut at next week’s meeting.

Back in January, we highlighted that Chief Economist Philip Lane mentioned how key figures would available by the June policy meeting. At the time, the mention of a specific month felt like a significant intervention – and indeed policymakers have proceeded to signpost the June meeting as the likely start of the easing cycle with increasing clarity.

In fact, some of the 'important data' mentioned by Lane wasn’t exactly good news on paper for the ECB. Negotiated wage growth increased from 4.5% to 4.7% Y/Y in Q1. But a quickly-released ECB blog ('Tracking euro area wages in exceptional times') emphasised that one-off factors (especially in the German public sector) have contributed to this stronger rise in the negotiated wage index. The ECB’s own ‘wage tracker’, which smooths one-off factors across a 12-month period, shows a much more supportive situation.

Unfortunately this series, which is seemingly an important part of the ECB’s reaction function, has not yet been released to the public. But the message is clear: this small increase in headline negotiated wage growth will not derail the ECB’s June rate cut.

Policymakers will also be willing to look past today’s inflation figures. The headline rate surprised to the upside, accelerating from 2.4% in April to 2.6% in May. This was driven by the services component which increased to 4.1% on the back of base effects related to the introduction of subsidised public transport tickets in Germany last year. We see this as a temporary blip and we continue to expect the euro area disinflation process will reassert itself over coming months given signs of cooling price pressures in the services sector.

This week the European Commission’s ESI survey showed that three-month price expectations in the services sector have eased every month this year, which follows the sizeable fall in the services PMI output price component last week. Meanwhile, forward-looking inflation expectations remain well-anchored. The ECB’s measure of household expectations fell further this week, for both the one- and three-year horizons.

Related posts