Will they, won’t they? Fund managers watch for ECB rate cut ahead of Fed

Asset managers are waiting to see if the European Central Bank (ECB) will cut interest rates this week ahead of the Federal Reserve.

Jason Davis, global rates portfolio manager at JP Morgan Asset Management, said the ECB could take this measure.

“Yes, and if anything, the ECB will be keen to prove it is not an extension of the Fed’s monetary policy. The fundamentals are diverging in the two economies with European growth still below trend, less fiscal support, more labour hoarding and a clearer slowdown in core inflation,” he said.

Whilst Fed policy matters for the global outlook, the ECB is determined to react to domestic fundamentals, said Davis.

“Cutting before the Fed will reinforce this narrative and ensure European monetary conditions are driven more by European, and not US, fundamentals.”

However, Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, expects the ECB to remain on hold.

He said a majority of ECB Governing Council (GC) members seem united behind a first rate cut in June rather than April, meaning this week’s meeting will largely be about the GC confirming its growing confidence that inflation will return to 2%, which is a necessary condition for starting the easing cycle.

However, a “second piece of evidence” is still awaited: a confirmation of wage growth moderation, which will not arrive until 23 May, a few days before the June meeting.

“Against this backdrop, we expect the ECB to remain on hold this week while adopting a dovish tone, setting the stage for the start of the easing cycle in June (barring any upside surprises on wages), potentially fueling expectations of successive cuts to follow.”

Peter Goves, head of developed market debt sovereign research at MFS Investment Management, expects policy rates to most likely be unchanged this month, but the ECB can still cut before the Fed.

“We expect no change in ECB policy rates this week. [ECB president Christine] Lagarde could hardly have been clearer that the General Council is waiting for more data (particularly on wages, profits and the labour market) before committing to a policy change. This is therefore likely to be much more of a “placeholder” meeting in our view.”

He added: “In our view, the ECB could cut before the Fed if it is warranted by the fundamentals, its reaction function and the objective to get its inflation to target. Lagarde is almost certainly not going to commit to a specific rate path when the ECB dials back its stance, but we think back-to-back cuts can’t be ruled out if the data warrant it.”

Goves believes the ECB “will likely” cut its policy rate by 25bp in June, predicated on the “weakish” growth outlook and falling inflation, among other factors.



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