Moody's Analytics: ECB Rate Cut on Track for June
Sign up for Global Macro Playbook: Stay ahead of the curve on global macro trends.
Moody's Analytics expects the European Central Bank (ECB) to implement its first interest rate cut in June, despite persistent inflation within the services sector, according to a research report published on Thursday. While acknowledging the need for further data to solidify the decision, the research firm suggests the ECB is on course to shift its monetary policy stance.
"We interpret the ECB’s press statement and President Christine Lagarde’s comments as showing that if inflationary pressures continue on their current trend, then a rate cut is called for," the report states.
Moody's Analytics highlights the recent decline in headline inflation, reaching 2.4% year-on-year in March, driven by easing food and core goods inflation. However, services inflation remains a concern, remaining stagnant at 4% annually for the past five months. This stickiness is attributed to persistent wage growth and elevated producer prices within the services sector.
"Sticky costs point to sticky prices," the report explains. "Energy is an important input cost for services, but labour costs are a main influence."
Despite these inflationary pressures, Moody's Analytics anticipates a minor decline in wage growth and services producer price inflation will be sufficient to justify a June rate cut. They also foresee consecutive 25-basis point cuts in each of the remaining 2024 meetings, barring any significant worsening of key data points.
The report further notes the impact of the ECB's current interest rate policy on financing conditions, with banks offering more attractive rates on overnight deposits. This has led to a stabilization of the money supply following sharp declines earlier in the year.
"The search for better returns in a high-inflation environment led to a relative exodus out of cash and more liquid forms of money and into higher yielding deposits," the report explains.
While acknowledging the potential for a pause in rate cuts if data worsens, the research firm believes the ECB's balance sheet policy will continue its tightening trajectory. The Asset Purchase Programme is expected to shrink further, while the Pandemic Emergency Purchase Programme will begin to be drawn down in the second half of the year.