ECB preview: mainly an interim assessment towards June rate cut

• We do not expect any decisions to be made at next week’s ECB Governing Council (GC) meeting. Depo rate to remain at 4%.

• Stakes remain low, as it's an interim meeting, pending for key data releases and updated forecasts at the June meeting. We expect no change in communication from the March meeting.

• While first rate cut in June now seem to be the consensus – within markets and GC, we will be on the lookout for any clues about pace of easing cycle. Data-dependence narrative to dominate.• We continue to expect the first rate cut to occur in June, followed by two more at forecast meetings by year-end.

A decision free meeting. Depo rate is to remain at 4%. Policy guidance at the time of the March meeting was very clear: “we will know a bit more in April, and a lot more in June”. Meanwhile, the latest activity data is consistent with the ECB downwardly revised March baseline, foreseeing tentative signs of improvement in the short-term projecting euro area Q1 GDP growth at +0.1% q/q. Although, we do agree we have been flagging downside risk recently. “Flash” March inflation eased further (0.2 percentage points) yielding headline and core at 2.4% y/y and 2.9% y/y respectively. Although prints came in lower-than-expected, services inflation remained at 4% for a fifth month in a row showing still resilient domestic pressures to prolong ECB’s concerns about “high domestic inflation” mentioned at the March meeting.

Building data dependent large majority for June rate cut. Next week’s meeting comes just four weeks from the previous one, naturally reducing the amount of new information available from March’s fresh forecasts. Over the next few weeks, preliminary estimates of eurozone’s Q1 24 national accounts (30 April) as well as Q1 2024 wage growth, including ECB’s series (likely to be released between the second and third week of May) will be released. These will be crucial outturns to check ECB’s key assumptions underpinning the March forecasts: expected labour productivity pick-up and reduced profits absorbing increased labour costs and input into Eurosystem’s staff forecast update at the June meeting. Meanwhile, we have noticed increased Governing Council’s view convergence for the start of the easing cycle. In other words, the bar is set to be very high to not be cut in June.

What may come next after June – watch for market guidance. Firmly pre-committing to a June rate cut, bar a significant data/event surprise, President Lagarde is likely to be asked about the shape of the easing cycle during the Q&A. We do not think that she will be in a position to say much at such an early stage, but sticking to data-dependence in the context of its three pillar strategy, namely inflation outlook, underlying inflation, and the strength of monetary policy transmission. We think she is likely to keep a prudent tone – all but declaring final victory over (domestic) inflation. Similar to the March meeting, she may venture onto commenting about market expectations – 91 basis points (bps) worth of cuts by year-end at the time of writing.No change to our rate call. We maintain our long-held call of a 25 (bps) rate cut in June – three in total this year.