The ECB is preparing to maintain interest rates despite the economic weakness of the euro zone

The president of the ECB, Christine Lagarde, during the Davos forum.DENIS BALIBOUSE (REUTERS)

The waiting pattern continues in Frankfurt.

The European Central Bank (ECB) will most likely keep interest rates frozen at 4.5% this Thursday – 4% if the deposit facility is taken into account – despite the weak economic growth in the euro zone.

With no changes in sight, markets will look for clues in the speech of the head of the institution, Christine Lagarde, about when the rate cuts will begin.

Everything indicates that the pressure within the ECB in the coming weeks will be maximum: the European economy continues to cool, credit continues to reduce and inflation relaxes.

Analysts are redoubling their bet on a prompt drop in the price of money despite the fact that geopolitical tensions in the Red Sea once again impose caution in the face of the threat of another distribution jam.

Diplomacy has now become part of the job of a central banker.

Lagarde will have to balance again this Thursday to convince the markets that she will not let her guard down in the face of any possible rise in inflation and that, at the same time, the economy continues with its soft landing despite the bad activity data for January in Germany.

So far, the Frenchwoman has managed to ensure that her plans do not derail: the euro zone continues to avoid recession and inflation fell from 9.2% at the end of 2022 to 2.9% in December 2023.

International organizations, from the IMF to the central bank coordinator (BIS), insist the issuing institutes not to give up on the risks that continue to exist on the horizon: the crisis in the Middle East and the delay of governments in withdrawing stimuli from the economy.

However, the markets believe that European institutions will soon stop worrying about inflation to once again focus on what appears to be the big underlying problem: the anemic growth of the Old Continent.

In its latest forecasts, the ECB predicts a meager advance of 0.8% of GDP for 2024, only two tenths more than in 2023. However, activity data in January indicate that the bloc's largest economy, Germany, continues without raise head

Given the inability of governments to launch new stimulus packages, analysts think that the only way to encourage growth will be to lower rates, even before the summer.

“In the absence of fiscal stimulus, and given that we must be more autonomous in the expansion of our economy, the only solution to support growth and employment is to lower interest rates,” says Philippe Waechter, chief economist at Ostrum AM.

"The ECB will not do it at Thursday's meeting, but it is what must be done to avoid a greater risk for activity."

In this week's council, in fact, the ECB will not have new forecasts.

And, like most monetary institutes, Frankfurt has declared itself “dependent on the data” it obtains.

Especially the evolution of three indicators: the CPI, underlying inflation and the transmission of monetary policy.

December data underlines that prices continue to moderate, although ECB board members have warned of possible rebounds in the coming months.

Regarding the effectiveness of the rate increases, the latest available data indicate that bank credit continues to contract in the eurozone as a whole.

“Probable” decline

With the lever of the price of money still cooling the economy, the ECB observes above all the evolution of wages and business margins in economies that, on this occasion, exhibit a strong labor market.

However, the managing director of the BIS, Agustín Carstens, anticipated last Monday: “So far we are not seeing evidence that a wage-price spiral is unfolding.”

Perhaps for this reason, for Lagarde it is no longer taboo to talk about future rate cuts.

In an interview on

Bloomberg

, the Frenchwoman recently said that a cut starting in the summer is “likely.”

“We are saying we are data dependent and there is still some uncertainty and there are some indicators that are not anchored at the level we would like to see them at,” she warned.

Even so, markets are already pricing in central bank cuts.

It happens in the United States, where stock markets are once again climbing to historic highs, and in Europe, where debt markets or the Euribor have relaxed.

“It is a perennial paradox of monetary policy: the longer you wait for a rate change, the less necessary it becomes,” says Felix Feather, an economist at the investment firm Abrdn.

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