Overnight, the German stock market, the DAX extended its rebound, driven by gains in the tech sector.
Its recovery in recent days has come despite ECB members sounding more hawkish than expected ahead of this week’s meeting; despite evidence of slower growth and falls in underlying inflation.
What is expected from this week’s ECB meeting?
At its last meeting in December, the ECB kept its deposit rate on hold at 4.00%, as widely expected. The ECB noted that with interest rates at this level, it will make a “substantial contribution” to returning CPI to its 2% goal in 2025. Inflation data for December received in early January showed core inflation cooling to 3.4%, the lowest since March 2022, and headline inflation stayed below 3%.
While this shows that tighter monetary policy settings are winning the battle against high inflation, tighter monetary policy also impacts growth and activity data. Reflecting concerns that the European economy, led by Germany, will enter recession in 2024, the European rates market is pricing in 130bp of ECB rate cuts for 2024.
Nonetheless, in the lead-up to this week’s meeting, ECB officials, including president Lagarde, have noted that aggressive pricing of rate cuts is not “helping our fight against inflation”. As such, the ECB is expected to keep rates on hold this week and reiterate that rates will be set “at sufficiently restrictive levels for as long as necessary.”
