The governing council of the European Central Bank (ECB) meets this Thursday for the first time in 2024, as it does every six weeks. The session focuses on the euro area’s economic path, price stability, and policy signals from the institution and its president. Members of the executive board, together with governors from the national central banks of the eurozone, have signaled that no major changes are expected in this meeting. Yet market participants will scrutinize the nuances in the messaging, looking for hints about the policy stance and the anticipated timetable for any potential adjustments to policy settings, including the timing of a possible rate move. Christine Lagarde’s remarks are watched closely for any clarification about the intended pace of any future cycle in rates and the overall assessment of inflation dynamics.
What is required for you to decide on rates?
The odds of an immediate rate change remain slim. The ECB has emphasized that since the last rate increase in September, the monetary stance has been kept at levels deemed consistent with progress toward the 2% inflation target over the medium term. This stance has contributed to containment of price pressures, with the policy rate staying at a high level after a sequence of increases in 2022 and 2023. The deposit facility, the rate charged on banks’ excess reserves held with the central bank, remains at the upper end of its historical range, reflecting how policy tools are calibrated to curb inflation while supporting the economy. The central bank’s actions in 2022 through 2023 marked an unusually rapid tightening cycle, aimed at restoring price stability after persistent inflationary pressures.
When might rates start falling?
The question of when rate cuts might begin is central to market expectations. Christine Lagarde outlined a potential timeline for a softer stance during the summer, framing it as a conditional path dependent on inflation moving toward the target and avoiding negative surprises from wages, corporate margins, energy costs, and global supply chains. This framing means the move is not a guarantee but a carefully weighed possibility, contingent on incoming data across spring months. The inflation trajectory and the absence of unexpected shocks will heavily influence the timing of any easing. Investors will be watching for signals on how the ECB balances the desire to reduce policy support with the need to sustain progress toward the 2% goal.
When does the market expect these to drop?
Prior to recent remarks, investor consensus leaned toward an initial rate cut around April, with further reductions penciled in for the year as inflation cooled toward target. Yet the central bank has repeatedly warned that December projections, which anticipated inflation easing toward 2% next year, carry uncertainties. Market chatter has shifted toward a gradual easing path, with some arguing for a first cut in April and others nudging the timeline toward June. The evolving forecast reflects ongoing assessments of inflation, labor dynamics, and global energy trends, all of which feed into the central bank’s risk assessment and policy outlook.
What could delay the rate cut?
Any delay hinges on several variables. Inflation may persist longer than expected if wage growth strengthens or if firm margins rise. The ECB needs to be confident that wage dynamics can be absorbed without reigniting price pressures. Energy prices and global supply chains, along with geopolitical tensions, remain potential sources of renewed price tensions. Market expectations can also influence policy. If markets price in a rate cut too aggressively, the central bank might push back to preserve credibility in its inflation fight. Lagarde has emphasized that policy is data-dependent, and the central bank will adjust its stance only when the data justify it.
What could make the interest rate cut stand out?
The trajectory of the euro zone’s economy will be the decisive factor. Data showed modest activity changes in the latter part of the year, with leading indicators hinting at softer momentum going into the fourth quarter. If December forecasts show a meaningful deterioration in growth or a sharper-than-expected slowdown, a sooner or larger rate cut could be warranted to support demand and ensure inflation moves toward the 2% target. Analysts underscore that a credible easing path would require ongoing evidence that inflation is converging toward the target without triggering a loss of momentum in the economy.
What will be the impact on mortgages and deposits?
The prospect of lower official rates has already influenced market rates. Euribor, a key benchmark for euro area lending, edged down as expectations shifted toward easing, which in turn affects the pricing of variable-rate mortgages and other loan products reviewed on a semiannual basis. New mortgage rates for December showed a modest decline, reflecting the anticipated policy shift. At the same time, deposit rates have begun to move higher gradually as banks adjust pricing in light of the changing policy environment. The ultimate pace and magnitude of any declines will depend on both the timing of the first cut and how quickly rate reductions are transmitted through the banking system, affecting borrowing costs for households and businesses.