Aperçu de la BCE : rendez-vous en mars

We expect the ECB Governing Council (GC) to cut interest rates by 25 bps for a fourth consecutive time to 2.75% as widely expected. Hard and soft activity data have remained sluggish since the December meeting. However, as expected, headline inflation crept up at the end of 2024 following the positive energy base effect. The average oil barrel price has increased by approximately 13% in euro terms since the cut-off date of latest ECB projections, although this is not enough, in our view, to derail the ECB from cutting. In an interview earlier this month, ECB Executive Board member Philip Lane highlighted the risk of keeping interest rates too high, as it could lead to an undershooting of the inflation target, thus justifying no pause at the January meeting. At the opposite spectrum within GC, Bundesbank President Nagel reportedly said "that there is a certain probability that the ECB will cut rates next week". Finally, even after cutting to 2.75%, the ECB's depo rate would still be (slightly) above the neutral rate range - the rate that neither stimulates nor constrains economic activity - mentioned by Lagarde in December (2.50%-1.75%).

We expect no change in communication. In December, the GC changed its forward guidance to keep "policy rates sufficiently restrictive for as long as necessary" to stabilise inflation sustainably at target. This should be maintained until we receive further data, policy implementation in the US and political developments in Germany and France. All this warrants a cautious and gradual approach from the ECB. Furthermore, a broad consensus has emerged among the GC (Villeroy, Nagel) that a 2% depo rate could be reached by the summer, in line with the market’s, and our own, expectations. Thus, we think the ECB is likely, for now, to look through recent spike in energy prices.

Challenges on more expensive long term funding /impact from quantitative tightening (QT). Long-end rate sell-off has been a key feature of the beginning of 2025, despite the recent rally. ECB President Lagarde may be questioned on the path of QT, as it's significantly pushing up member states' net issuance, though this has been well absorbed so far. We do not think any changes on QT are coming. Perhaps, more interestingly, she is likely to be asked on the impact of such long end moves, their counter-productive nature vis-a-vis ECB policy direction, now that the ECB is to set an "appropriate policy stance", rather than a sufficiently restrictive one, and whether it could push the ECB to ease more. ​ ​ 

We maintain our baseline of continuous cuts until June to 2%, reaching 1.5% by year-end. Our baseline foresees only moderate growth improvement driven by private consumption this year. Continuous acceleration next year requires a recovery in investment that we see mainly driven by our expected rate cuts. While next week's decision is likely to be a walk in the park, much more challenging times lie in the Spring, as soon as March, as we head closer to the neutral rate. Incoming data will be paramount to tilt the decision to whether landing within neutral (2%) will be enough, or whether outright accommodation will be required, as is our baseline.

We expect the ECB Governing Council (GC) to cut interest rates by 25 bps for a fourth consecutive time to 2.75% as widely expected. Hard and soft activity data have remained sluggish since the December meeting. However, as expected, headline inflation crept up at the end of 2024 following the positive energy base effect. The average oil barrel price has increased by approximately 13% in euro terms since the cut-off date of latest ECB projections, although this is not enough, in our view, to derail the ECB from cutting. In an interview earlier this month, ECB Executive Board member Philip Lane highlighted the risk of keeping interest rates too high, as it could lead to an undershooting of the inflation target, thus justifying no pause at the January meeting. At the opposite spectrum within GC, Bundesbank President Nagel reportedly said "that there is a certain probability that the ECB will cut rates next week". Finally, even after cutting to 2.75%, the ECB's depo rate would still be (slightly) above the neutral rate range - the rate that neither stimulates nor constrains economic activity - mentioned by Lagarde in December (2.50%-1.75%).

We expect no change in communication. In December, the GC changed its forward guidance to keep "policy rates sufficiently restrictive for as long as necessary" to stabilise inflation sustainably at target. This should be maintained until we receive further data, policy implementation in the US and political developments in Germany and France. All this warrants a cautious and gradual approach from the ECB. Furthermore, a broad consensus has emerged among the GC (Villeroy, Nagel) that a 2% depo rate could be reached by the summer, in line with the market’s, and our own, expectations. Thus, we think the ECB is likely, for now, to look through recent spike in energy prices.

Challenges on more expensive long term funding /impact from quantitative tightening (QT). Long-end rate sell-off has been a key feature of the beginning of 2025, despite the recent rally. ECB President Lagarde may be questioned on the path of QT, as it's significantly pushing up member states' net issuance, though this has been well absorbed so far. We do not think any changes on QT are coming. Perhaps, more interestingly, she is likely to be asked on the impact of such long end moves, their counter-productive nature vis-a-vis ECB policy direction, now that the ECB is to set an "appropriate policy stance", rather than a sufficiently restrictive one, and whether it could push the ECB to ease more. ​ ​ 

We maintain our baseline of continuous cuts until June to 2%, reaching 1.5% by year-end. Our baseline foresees only moderate growth improvement driven by private consumption this year. Continuous acceleration next year requires a recovery in investment that we see mainly driven by our expected rate cuts. While next week's decision is likely to be a walk in the park, much more challenging times lie in the Spring, as soon as March, as we head closer to the neutral rate. Incoming data will be paramount to tilt the decision to whether landing within neutral (2%) will be enough, or whether outright accommodation will be required, as is our baseline.

We expect the ECB Governing Council (GC) to cut interest rates by 25 bps for a fourth consecutive time to 2.75% as widely expected. Hard and soft activity data have remained sluggish since the December meeting. However, as expected, headline inflation crept up at the end of 2024 following the positive energy base effect. The average oil barrel price has increased by approximately 13% in euro terms since the cut-off date of latest ECB projections, although this is not enough, in our view, to derail the ECB from cutting. In an interview earlier this month, ECB Executive Board member Philip Lane highlighted the risk of keeping interest rates too high, as it could lead to an undershooting of the inflation target, thus justifying no pause at the January meeting. At the opposite spectrum within GC, Bundesbank President Nagel reportedly said "that there is a certain probability that the ECB will cut rates next week". Finally, even after cutting to 2.75%, the ECB's depo rate would still be (slightly) above the neutral rate range - the rate that neither stimulates nor constrains economic activity - mentioned by Lagarde in December (2.50%-1.75%).

We expect no change in communication. In December, the GC changed its forward guidance to keep "policy rates sufficiently restrictive for as long as necessary" to stabilise inflation sustainably at target. This should be maintained until we receive further data, policy implementation in the US and political developments in Germany and France. All this warrants a cautious and gradual approach from the ECB. Furthermore, a broad consensus has emerged among the GC (Villeroy, Nagel) that a 2% depo rate could be reached by the summer, in line with the market’s, and our own, expectations. Thus, we think the ECB is likely, for now, to look through recent spike in energy prices.

Challenges on more expensive long term funding /impact from quantitative tightening (QT). Long-end rate sell-off has been a key feature of the beginning of 2025, despite the recent rally. ECB President Lagarde may be questioned on the path of QT, as it's significantly pushing up member states' net issuance, though this has been well absorbed so far. We do not think any changes on QT are coming. Perhaps, more interestingly, she is likely to be asked on the impact of such long end moves, their counter-productive nature vis-a-vis ECB policy direction, now that the ECB is to set an "appropriate policy stance", rather than a sufficiently restrictive one, and whether it could push the ECB to ease more. ​ ​ 

We maintain our baseline of continuous cuts until June to 2%, reaching 1.5% by year-end. Our baseline foresees only moderate growth improvement driven by private consumption this year. Continuous acceleration next year requires a recovery in investment that we see mainly driven by our expected rate cuts. While next week's decision is likely to be a walk in the park, much more challenging times lie in the Spring, as soon as March, as we head closer to the neutral rate. Incoming data will be paramount to tilt the decision to whether landing within neutral (2%) will be enough, or whether outright accommodation will be required, as is our baseline.

Hugo Le DamanyFrançois Cabau