European Central Bank: All eyes on June

Having clearly set the scene for this meeting with the statement in March that by April they would have a “little more” data, but by June they would have a “lot more” data, expectations were low for any policy amendments for last week’s meeting of the European Central Bank (ECB) Governing Council.

Market pricing for the first interest rate cut had firmly shifted to the June meeting and incoming data over recent weeks had done little to shift the market from this path. The meeting also came at a time where government bond markets had sold off dramatically as US inflation data had come in a little higher than consensus expectations just 24 hours earlier, meaning the focus was really on what to expect from the ECB come June and, crucially, the path of interest rates thereafter.

No changes were announced to policy and ECB President Christine Lagarde addressed what to expect going forward by stating on several occasions during her official statement and subsequent press conference that, the ECB was “not committing to a particular rate path”, and they remain very much “data dependant”. In an attempt to perhaps prevent the volatility in markets seen following  US inflation data print, Lagarde was also keen to point out that inflation was expected to fluctuate over the course of 2024 but should return to their 2% target in 2025. She also stressed the differences between the US and euro zone economies and inflation drivers, though did acknowledge that the global environment needed to be taken into account when setting monetary policy.

In terms of market reaction, the initial response was for European government bonds to rally, likely in response to the dismissal of US inflation data impacting the ECB’s decision-making process. Later however, bonds gave back these gains as global bond markets continued their weakness from the previous session. Markets are now pricing a 90% probability of an interest rate cut by the ECB in June with a further two-to-three cuts to follow over the course of 2024. However, there are eight weeks until the next meeting,  encompassing plenty of data points and with both the US Federal Reserve and the Bank of England Monetary Policy Committee meeting in early May, we feel there is likely to be little respite from the volatility observed during the year to date.

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