Will the central bank cut interest rates before the Federal Reserve? What are the highlights of this week's European Central Bank meeting?

The European Central Bank will hold a rate meeting on Thursday this week. Currently, as European inflation slows down, the market is closely watching for any signs of interest rate cuts. 1/ Focus on the timing of the first rate cut The European Central Bank is currently on a difficult path, trying to maintain high enough interest rates to curb inflation, while avoiding cutting rates too late once price pressure eases. It is expected that the European Central Bank will keep rates at a record level of 4%. Jens Eisenschmidt, chief European economist at Morgan Stanley, said, "Even though opinions differ on timing, ECB spokespersons have acknowledged that a rate cut is imminent. The March meeting will be an opportunity to change the statement language to reflect this." The European Central Bank has already pushed back against discussions of rate cuts. Compared to earlier expectations of a 150 basis point cut this year, the market now expects a 90 basis point cut. Nevertheless, loose policies are still in the cards, and traders hope for guidance on the timing of the first move. Peter Kazimir, Governor of the Slovak Central Bank, said that the European Central Bank will acknowledge improved inflation prospects on Thursday, but must avoid any commitment to a rate cut. Salomon Fiedler, European economist at Berenberg, said, "The market's pricing on rate cuts has been moving towards a more sensible direction, reducing the need to start all over again." He added that ECB President Lagarde may reiterate the data dependency. 2/ Is there a risk of the ECB cutting rates too late? There is a risk of cutting rates too late. If inflation falls faster than expected, delaying a rate cut will increase the possibility of taking more aggressive measures in the future. Francois Villeroy de Galhau, Governor of the Bank of France, said, "Taking a gradual and pragmatic approach may be more preferable than deciding too late and then having to adjust excessively." A cautious approach also has its reasoning. Lagarde emphasized that the ECB must avoid cutting rates too early, as this would prolong high inflation. Even Yannis Stournaras, Governor of the Bank of Greece, believes that the "optimal time" for a rate cut might be in the second half of the year. Gareth Hill, portfolio manager at Royal London Asset Management, said, "If this is a message from the Governor of the Bank of Greece, then it may be a good indicator that June will be the time we see action from the ECB, rather than earlier." 3/ How will wage data impact? The European Central Bank considers wage levels to be the most important factor in determining its ability to cut rates. The negotiated wage growth rate in the fourth quarter slowed from 4.69% in the previous quarter to 4.46%, the highest since 2005. The more forward-looking indicator from the Indeed website reached its peak at the end of 2022, but was still at 3.9% in January, higher than the ECB's target of 3% consistent with 2% inflation. Key first-quarter wage data crucial to the ECB will not be released until May, so policymakers will have enough evidence in June to verify the extent of the deceleration in wage growth. 4/ What will the ECB's latest forecasts show? Economists expect downward revisions to the ECB's economic growth and inflation forecasts for 2024. Currently, eurozone economic growth has been hovering near zero growth for six consecutive quarters, with the EU Commission recently lowering its GDP growth forecast for this year from 1.2% to 0.8%. Data from last Friday showed that eurozone inflation in February dropped from 2.8% to 2.6% from the previous month. Andrzej Szczepaniak, senior European economist at Nomura Securities, pointed out, "Given that energy prices are about 20% lower than macro forecasts in December, the ECB's forecast for overall inflation is expected to decrease." 5/ Is it important for the ECB to cut rates before the Fed? The timing of rate cuts by both is not important. The eurozone economy is weaker than the US, meaning there is more reason to adopt loose monetary policies. However, history shows that the ECB typically acts after the Fed, so who acts first is a topic of discussion, especially as an early rate cut by the ECB could put pressure on the euro. According to LSEG data, traders believe there is a high likelihood of both the ECB and the Fed starting to cut rates in June, with the ECB slightly more likely. Rohan Khanna, head of euro rate strategy at Barclays Bank, said, "There is no reasonable economic argument to support the view that the ECB cannot cut rates unless the Fed does so first."