ECB Pauses the Rate and the EURUSD Soars – What is Happening?

In a closely watched move, the ECB stood firm on its monetary policy, leaving all parameters and formal guidance unchanged, aligning with widespread expectations. The latest ECB staff projections unveiled a tempered growth outlook, with a -0.2-percentage point downgrade to 0.6% for the year 2024, signalling challenges in the economic landscape.

ECB Economic Calendar

KEY FIGURES:

• ECB Policy Rate: 4.00%
• GS: 4.00%
• Consensus: 4.00%
• Previous: 4.00%

NOTABLE DEVELOPMENTS:

1. Growth Projections Diminished: The ECB staff projections disclosed a notable -0.2 percentage point downgrade, bringing the growth forecast for 2024 to 0.6%. This revision was underscored by -0.1 percentage point decreases in the sequential pace for each quarter of the year. Despite acknowledging the persisting economic weakness, the Governing Council remained cautiously optimistic, pointing to surveys that hinted at a gradual recovery throughout the year.
2. Core Inflation Adjustments: Core inflation faced a significant reassessment, experiencing a -0.1-percentage point adjustment to 2.6% in 2024, a more substantial -0.2 percentage point downgrade to 2.1% in 2025, and another -0.1-percentage point reduction to 2.0% in 2026. Concurrently, headline inflation witnessed a -0.4-percentage point cut to 2.3% in 2024, a -0.1-percentage point dip to 2.0% in 2025 and maintained a steady 1.9% in 2026. The Governing Council acknowledged the easing of various measures of underlying inflation while recognizing persistent domestic price pressures.
3. Policy Parameters Unaltered: The ECB Governing Council, as anticipated, opted to keep policy parameters and formal guidance unchanged. In the subsequent press conference, President Lagarde highlighted ongoing progress in combating disinflation, expressing growing confidence in the sustainable return of inflation to the target of 2%. However, she emphasized the need for more convincing evidence and hinted at a data-dependent approach, anticipating a wealth of information to emerge between the April and June meetings. Lagarde refrained from committing to a specific "pace, rhythm, or magnitude" for future actions.
4. Operational Framework Review Announcement: President Lagarde anticipates the completion and announcement of the operational framework review on March 13, shedding light on potential adjustments to the ECB's approach.
5. Maintaining Forecast for Policy Adjustment: Despite the current hold, analysts maintain their forecast for a 25 basis points cut in June, followed by consecutive 25 basis points reductions, bringing the rate to 2.25% by March 2025. This projection reflects a cautious outlook, considering the evolving economic landscape and the ECB's commitment to adapt its stance based on incoming data.

Insights Inspired by Goldman Sachs: Credit to Their Analysis for Shaping Some Aspects of This Text

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