Weekly Update - Central banks: waiting for reassurance in the spring

The European Central Bank (ECB) kept its key interest rates steady at the March meeting, and the Federal Reserve and the Bank of England (BoE) are likely to do the same at their meetings next week. The ECB's dovish stance was accompanied by a communication leaving the door open to the start of a rate cut cycle at the end of spring given the decline in inflation, a cycle that will remain gradual. In Japan, expectations for monetary policy normalization are accelerating.

ECB: door open to first rate cut in June. At its meeting on March 7th, the ECB left monetary policy on hold, with its deposit facility paying 4% and a refi rate of 4.5%. It also said it would continue to run down its balance sheet as planned. While this decision was widely pencilled in by investors, the downgrading of the inflationary outlook for 2024 and 2025 to 2.3% and 2%, respectively, and comments by ECB Chairwoman Christine Lagarde at the press conference suggested the bank would begin its rate-cutting cycle at the June meeting. While hailing progress on inflation so far, Ms. Lagarde said she needed more data before starting to cut rates and “we will know a lot more in June”. All of which reinforces our scenario of an initial rate cut late in spring. We then expect the ECB to tread cautiously, making just three rate cuts in 2024. Ms. Lagarde also said the trend in services prices was not yet compatible with stable inflation at 2% (Chart 1).

Fed: rates on hold and prospect of cuts in the spring. The Fed is widely expected to hold rates at 5.25-5.5% at its March 20th meeting. But the main elements to watch at this meeting will be the update to the Fed's economic scenario and committee members’ forecasts on the timing of the rate-cutting cycle. We think the Fed will also go for an initial rate cut in June and continue to loosen policy at a cautious pace. Inflation continues its slow decline (February core PCE expected at 2,8%) as forecast in the Fed's December 2023 economic scenario, in which the bank also assumes three rate cuts. However, services inflation - still running above its pre Covid average and having risen in both the last two months - and the resilient economic activity should lead the Fed to strike a prudent tone.

BoJ: back toward normal soon. Unlike other leading central banks, the Bank of Japan looks ready to re-embrace orthodoxy after a decade of unconventional monetary policies. Investors expect an end to the negative interest rate policy and a further easing of the yield curve control mechanism. This normalisation comes as the Japanese economy is at long last showing signs of shaking off deflation, with core inflation of 2% and wage negotiations likely to result in raises of 5%.

In the highlights of the week, we chose to talk about inflation data in the United States as well as industrial production data in Europe: 

• February's U.S. headline and core inflation surprised consensus, with CPI growth of 3.2% and 3.8% year-on-year, respectively, compared with expectations of 3.1% and 3.7%. These figures confirm the decline in inflation, but reflect the slowdown in the pace of disinflation, with the services component remaining strong. These figures should lead the Fed to maintain a cautious tone at the March 20 meeting.

• Industrial production in the euro area contracted sharply in January, falling by 3.2% compared to December 2024. A large part of this decline is attributed to the sharp contraction in production in Ireland (-29% month-on-month), whose data are very volatile due to the strong presence of multinational companies (due to intellectual property rights in particular). However, the main economies also showed weak industrial momentum, with a contraction in January for production in France of 1% m/m and a slight increase of 0.6% in Germany.

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