·       The ECB will keep rates on hold for a sixth straight meeting

·       Inflation has fallen closer to the ECB’s 2% target since the last decision

·       But the labour market is still tight, keeping services inflation high

·       Recent comments from ECB officials have guided toward a June rate cut

·       Focus will be on any tweaks to the policy statement to signal a June move and what happens in July

·       EUR could react the strongest to a more hawkish tone, as a “dovish hold” is expected

The ECB is fully priced to stand pat on rates at its meeting on Thursday. But all the focus will be on what signals it gives about future interest rate cuts, when they will start and how many there might be. Markets expect a first 25bps rate reduction in June, with a total of around 86bp of easing priced in for the whole of this year.

Eurozone inflation has continued to fall closer to the bank’s target in recent months. The disinflation trend remains in place with headline CPI recently dropping to its slowest print in over two years. The core print, which strips out volatile food and energy, declined below 3% for the first time since May 2022.

Mixed Governing Council

The ECB has been wary of services inflation which remains sticky and uncomfortably at 4% for five months in a row. Rate-setters on the Governing Council have been concerned about wages continuing to rise rapidly with unemployment at record lows and the labour market still strong, despite a stagnant economy.

That said, there has been some glimmer of light in the subdued economic environment as the composite PMI was recently revised higher above 50, which denotes expansion. Growth has been almost stagnant, held back by Germany, which fell into contraction as a slowdown in global trade suppressed demand for exports and crippled the nation’s manufacturing sector. 

ECB Speakers talk up June meeting

There appears to be a broad consensus among ECB policymakers that members should wait until their June meeting to decide whether to start cutting rates. President Lagarde has consistently said the bank will have more data to assess if wage growth is slowing enough to ease services inflation. Fresh staff economic projections will also be released at that meeting on 6 June.

Ultimately, the ECB have stressed that they want to feel more confident that inflation is falling and have more evidence, even with rates set at appropriately restrictive levels.

What changes to expect?

Tweaks to the statement language will guide markets on the ECB intentions. The bank could do this by changing the wording of its policy statement, so it no longer says interest rates have to be “maintained for a sufficiently long duration” to bring inflation to its 2% target. The Governing Council could explicitly declare an outright intention to cut rates in June, but with certain conditions. Otherwise, it might be left to President Lagarde’s press conference to provide guidance without binding the central bank’s hands if activity and wage data remain strong.

Market Reaction

With a “dovish hold” predicted, anything more hawkish would likely underpin some support for the euro. Whether this will be enough for EUR/USD to push above 1.09 may be dependent on less explicit signals about the scope of cuts to come. The risks are that activity and wage date remain strong, which would support a more cautious data dependent stance.