Dress me slowly, I'm in a hurry. The time for a rate cut has not arrived yet. As expected, the European Central Bank (ECB) has decided to leave the price of money within the range of 4.5%-4.75%. A pause (or plateau, as has been repeated on other occasions) that lasts and suggests that we are at the peak. It is the third time in a row that the ECB chooses not to make a move.
The inflation rate in the eurozone stands at 2.9%, far from the 10.6% in October 2022 and still above the 2% target.
While in previous meetings there was no talk of possible cuts, the discussion within the ECB Council now floats in the air, after the president of the issuing institute, Christine Lagarde, said in Davos that relaxation will most likely come after the summer.
Markets expect cuts of 130 basis points by the ECB this year. The ECB ended its fastest rate hike cycle in September, but has insisted it would be premature to even talk about rate cuts, with price pressures yet to fully subside and crucial wage negotiations they are still ongoing.
For now, the Red Sea crisis has not had a significant impact on energy prices or inflation. In the same statement, the bank states that: "apart from an energy-related bullish base effect on headline inflation, the downward trend in core inflation has continued and previous interest rate increases continue to be passed on." with force to the financing conditions".
With which the ECB will be pending various data. As Bank of America analysts highlighted in a note, “the evolution of salaries and benefits are key factors for the next decision.” In recent weeks, investors were betting decisively on a rate cut, which made the stock markets rise. These same analysts warn that this movement may have been too early since “the ECB considers that the current market valuation even poses a risk to the convergence of inflation towards the objective.”
In any case, the date of the cycle change is approaching. As the Nomura bank noted in a report, “it appears that almost all of the transmission of tighter monetary policy to financial policy has now occurred. "We have to wait to see if the rigidity of financial conditions has been enough to quell inflation or if it is too much and causes a recession."
Eurostat confirmed that eurozone GDP recorded a contraction of 0.1% in the third quarter compared to the previous three months, when it expanded by 0.1%. It should not be ruled out that the euro economies will enter a recession in the coming weeks, but it does not seem that the ECB has taken this aspect into account when deciding on monetary policy.
In a recent meeting with the media, the general director of GVC Gaesco Gestión, Jaume Puig, summed it up perfectly this way. “It doesn't really matter that much when it goes down. This is quite discounted. More important at this point is to understand to what extent. If we go towards a normalization of the cycle, we could go down to 3-3.25%, which would be a level in line with the average recorded in previous decades.”
