What to expect from the European Central Bank interest rate decision?

Economists are expecting the ECB to keep its three key interest rates steady, with the benchmark Deposit Rate at 4.0%, following the conclusion of the Governing Council’s March monetary policy meeting.

The central bank is likely to downgrade its forecasts for inflation and growth in its staff projections. The economic forecasts unveiled at the December meeting showed that the ECB estimated GDP to expand by 0.8% in 2024 from 1% previously estimated. Headline inflation was expected to average 2.7% in 2024 and 2.1% in 2025. The Bank had previously forecast price growth of 3.2% in 2024 and 2.1% in 2025.

Data published by Eurostat showed on Friday that the Eurozone annual Harmonised Index of Consumer Prices (HICP) rose 2.6% in February, cooling from a 2.8% increase in January but above the expected 2.5% growth in the reported period. The Core HICP inflation declined to 3.1% YoY in February, compared with January’s 3.3% reading while beating expectations of 2.9%.

Further, ECB’s closely watched indicator of Euro area’s negotiated wages grew at an annual rate of 4.50% in Q4 2023, slowing from a 4.70% increase in the third quarter.

With inflationary pressures easing and many ECB policymakers making it clear they want to see a further deceleration in wage growth, money markets are pricing in an interest rate cut for the June meeting, as against the previous expectations of a September rate cut.

Speaking in a Bloomberg interview on the sidelines of the World Economic Forum (WEF) Annual Meeting in Davos, back in January, ECB President Christine Lagarde said, “it is likely that we will cut rates by the summer.”

However, when asked about the timing of cuts at the post-policy meeting press conference a week later, Lagarde said that the central bank was “data dependent, not time dependent.”

That said, Lagarde is likely to maintain its hawkish bias until the Eurozone indicator of negotiated wage rate for the first quarter is released on May 23.

Testifying before the European Parliament last month, President Lagarde said "our restrictive monetary policy stance, the ensuing strong decline in headline inflation and firmly anchored longer-term inflation expectations act as a safeguard against a sustained wage-price spiral