Inflation Target of 2% Driving ECB Policy

Following up on the FED pivot and dovish stance for 2024, the ECB pushes the narrative that it will be more cautious in its approach to the 2% inflation target. For the ECB the inflation target of 2% is more critical and a key goal compared to other major central banks.

This is expected since the ECB is generally slower to make decisions based on the higher complexity in making monetary policy for with the Eurozone. Key points are:

• The European Central Bank (ECB) decided to maintain interest rates unchanged and cut inflation forecasts for 2024.
• ECB President Christine Lagarde emphasized the need to remain vigilant against inflationary pressures.
• The ECB aims for consumer price growth to reach its 2% target by 2025.
• The ECB announced changes to its bond-buying program, reducing reinvestments and ending purchases by the end of 2023.
• The euro strengthened after the ECB’s decision.
• Market expectations of rate cuts by major central banks, including the ECB, have increased. The market now expects 5 cuts for the ECB in 2024 but these cuts will take effect after the FED perhaps with the first cut after June or July.
• Eurozone growth forecasts have been trimmed due to weak data and reduced government spending.

In our view, the ECB now is postioned to cut rates after the FED and before the BOE based on inflation and growth considerations. Again, we think the market is too optimistic with the number of rate cuts priced in for all three major central banks. At the moment, markets are pricing in 6 cuts for the FED, 5 for the ECB and 4 for the BOE.

In terms of currency, following the ECB’s decision, the Euro should strengthen against major currencies, reflecting interest rate differencial expectations. However, this could also pose challenges for the region’s exporters, as a stronger currency can make their goods more expensive and less competitive in foreign markets. Also, weak and slow growth in Europe will mitigate some of the Euro strength.