Traders are betting that the European Central Bank (ECB) will definitely start cutting interest rates in June, and they just need a green light from policymakers on Thursday because the path has become clear. With a number of policymakers pointing to that as a possible date for the start of easing, Dutch central bank governor Klaas Knot says he has pointed to June, while Austrian Robert Holzmann does not oppose that date.
This is likely to indicate that interest rate cuts are coming. The question is to what extent the matter will be clear regarding June. Analysts say if the ECB chooses to be cautious, it may say that data is moving in the right direction for rate cuts, or it may indicate a data-conditioned move before June.
One of the potential concerns is services inflation, which has remained at around 4% for several months, reflecting a relatively rapid growth in wages. Data from last week showed a unexpected drop in inflation to 2.4% in March, which is expected to give the ECB confidence after lowering its inflation forecasts last month.
Policymakers want more signs of slowing down after negotiated wage growth fell to 4.47% in the fourth quarter from a record level of 4.69% in the previous quarter. The ECB has identified wages as the most important factor in determining whether it can cut interest rates, so the data for the first quarter, due out in May, is the main reason behind not seeing the ECB move on Thursday.
Geopolitical tensions and expectations of increased demand pushed Brent crude oil prices to their highest levels in five months above $90 a barrel last week, despite their decline on Monday due to signs of easing tensions in the Middle East. This is higher than the ECB’s expectations of $79 a barrel for 2024. On another front, natural gas prices, a key driver of inflation, fell.
