European Central Bank policymakers on Thursday lowered their annual inflation and growth forecasts, as they confirmed a widely expected hold of interest rates.
Staff projections now see economic growth of 0.6% in 2024, from a previous forecast of 0.8%.
They presented a more positive picture on inflation, with the forecast for the year brought to an average 2.3% from 2.7%. Looking ahead, staff see inflation hitting the ECB’s 2% target in 2025 and cooling further to 1.9% in 2026.
That appeared to increase market bets on rate cuts taking place in the summer of this year, with the euro trading 0.35% lower against the British pound following the news. Expectations have shifted to the June meeting, even as ECB staff stress they want to assess wage data from the spring before making a decision.
“We are in the disinflationary process and we are making progress,” ECB President Christine Lagarde said during a press conference on Thursday.
“We are more confident as a result, but we are not sufficiently confident, and we need more evidence, more data, and we know this data will come in the next few months. We will know a little more in April and a lot more in June.”
Policymakers have repeatedly signaled May as a key date, since wage settlements are set to be released that month.
On growth, the ECB forecast a gross domestic product expansion of 1.5% in 2025 and 1.6% in 2026, as the euro zone’s economic activity escapes its current stagnation. Germany, Europe’s largest economy, has already slashed its growth forecast for 2024 to 0.2%, down from a 1.3% estimate previously.
As the ECB has held rates at a record high since its September meeting, market participants have been eagerly awaiting the March projections for an indication on when it may begin cuts.
Its key rate is currently 4%, up from -0.5% in June 2022, following a run of 10 hikes.
Euro zone inflation eased to 2.6% in February from 2.8% in January, showing continued progress towards the ECB’s 2% target. However, the core figure which strips out energy, food, alcohol and tobacco proved stickier, at 3.1%.
‘Relatively dovish’
Antonio Serpico, senior portfolio manager at Neuberger Berman, said that the most likely scenario involved trims beginning in June and cuts of 25 basis points per meeting for a total of 150 basis points or more this year.
“The numbers were quite reassuring actually, we were not expecting any cut today,” he told CNBC’s Silvia Amaro.
“Today’s decision looks to be relatively dovish,” he said, given that both growth and inflation forecasts moved lower.
“That means that the ECB governing council is seeing growth as more sluggish and lower than what they saw it before… and also in terms of headline inflation and core inflation, the new projections are definitely weaker than the older ones.”
The main variable will be the stickiness of core inflation, driven by a tight job market, he added.
Core inflation projections were updated to 2.6% in 2024 from 2.7%, and to 2.1% in 2025 from 2.3%.
European bond yields were lower following the update, also marking an indication of increased rate cut expectations. The German 10-year yield was down 7 basis points.