Why the ECB waits until June to cut rates

A rate cut seems to be ruled out at the ECB meeting in April. There are too few governors convinced that the time is ripe for a interest rate cut and the economic data do not yet give reasonable confidence of a sustainable, bounce-free return of inflation to the two per cent target. The meeting on 6 June, when the new macroeconomic projections will also be available, is certainly the most appropriate time. 'The date for a first cut has become more visible,' already explained the summary report of the March meeting.

The April meeting will then serve to take stock of the situation but also to understand, if possible, what will happen after June. The expectations of the markets and analysts are rather aggressive. Many think of an uninterrupted series of cuts until the end of the year, and perhaps even beyond. Only a few expect a pause between the first and second cut - which would then take place in September and not July - in order to better assess the situation.

It is clear what analysts are looking at. The inflation trend in recent months is monotonic: the speed of the overall index has been declining since November 2022, with the sole exception of November 2023, which marked a sharper slowdown, then negated in December. on average, inflation has fallen by 0.5 percentage points each month, and although the trend has slowed recently, at 2.4 % it is now very close to touching the target. The annual rate of the core index has been falling since March 2023, with an average decline of 0.4 percentage points each month, and with no signs of deceleration- If one projects these trends into the immediate future, both measures of inflation will be at or below 2% per annum by June. There are no guarantees, but also no signs of a possible turnaround.

The ECB fears two different scenarios. The first, which does not emerge from the current data but is shown very clearly by statistical analysis on previous episodes of high inflation, tells of inflation rebounding and rising again because of a premature rate cut: this is a much feared event because a relapse would require higher rates than the current ones for a longer period of time. The second is that of inflation stabilising at levels higher than the target, such that there are fears that price dynamics are not really anchored. It is no coincidence that the ECB is keeping a close eye on services prices, which remain stable at 4% and show no signs of slowing down (the monthly figure for March even showed a very slight acceleration, albeit imperceptible to rounding). The long-term average is 2.1% (1.9% if the current episode of high inflation is excluded).

The indications coming from wages still give rise to fears of a tit-for-tat, a run-up between wages and profit margins that can only be passed on in prices. The differential between the annual change in labour costs per hour worked and the annual change in productivity was still very high at the end of 2023, at 6.5 per cent, down - clearly not enough - from 7.7 per cent at the end of September. The long-term average - perhaps no longer relevant in a still globalised but no longer pacified world - is 0.6 per cent. At the same time, negotiated wages were up by 4.5 per cent (against a long-term average of 2.4 per cent), against hourly productivity down by 0.8 per cent annually and productivity per person down by 1.3 per cent.