MFS: ECB is less restrictive, but uncertainties are increasing
The ECB cut rates by 25bp to 2.5% yesterday suggests that monetary policy is becoming considerably less restrictive. The change is wording is in line with expectations and justified by the past cumulative 150bp cuts. Policy rates are now closer to neutral than they have been over the past few years and some recalibration in the language is warranted, says Annalisa Piazza, Fixed Income Research Analyst with asset manager MFS.
“The cut is justified by clear disinflationary process and unchanged expectations that inflation is well on track. The picture for growth remains less clear cut. Risks are skewed to the downside but the GC fully acknowledges the high degree of uncertainty. Namely, Lagarde stresses on how the ECB will remain vigilant on future developments of trade wars, political situation and geopolitics. A lot of optionality has been left for future moves, with the data dependency and the meeting by meeting approach being confirmed”, Piazza says.
Piazza notes there were no surprises from the ECB updated projections, which don’t include potential tariffs, the fiscal stimulus and plans of higher EU defence spending. “Needless to say, the staff projections could change once there is more clarity on the ongoing uncertainty. By April, the picture for tariffs can potentially be less blurred and we will have more information on whether the German fiscal bazooka has passed in Parliament and EU plans on defence will have more shape. That said, it is hard to think about meaningful changes in the projections anytime soon as the progress on the topics above will heavily depend on timing, financing, implementation etc. In a nutshell, the ECB will remain attentive, vigilant and needs to be agile according to Lagarde.”
“It is hard to reach a conclusion on what the ECB will do in April. A pause is plausible if the outlook for growth quickly improves (including lending conditions and demand for loans that improved but remained sluggish). On the other hand, tariffs and another hit on confidence (especially consumers) and on investment plans would probably justify another back to back cut. Yesterday’s decision was based on three factors 1) disinflation being on track 2) monetary policy being less restrictive and lastly 3) the current huge uncertainty. Should the last evolve positively then the ECB could take a pause and restart cutting in June.”
Piazza: “Markets are extremely nervous due to the opposing forces at play and currently price in terminal rates higher than 2%. We see value at the short end of the curve whilst we are more cautious at the longer end that could be driven by more fears of a massive and quick increase in spending (more than what already in the prices).”
