Exclusive-Some ECB policymakers float back-to-back June, July cuts, sources say

By Thomson Reuters Mar 8, 2024 | 8:42 AM

By Balazs Koranyi and Francesco Canepa

FRANKFURT (Reuters) – European Central Bank policymakers overwhelmingly back June for a first interest rate cut and some have informally floated the idea of a further move in July to win over a small group that would prefer an earlier start, three sources said on Friday.

Several Governing Council members publicly expressed support on Friday for a rate cut before the summer as inflation in the euro zone is now falling faster than the ECB had anticipated.

ECB President Christine Lagarde had hinted after Thursday’s policy meeting that a cut was likely to come when the ECB meets on June 6, after key wage data has been released.

The sources, all with direct knowledge of the discussion, said policymakers had spent relatively little time discussing rate cuts on Thursday, and that it was obvious a majority favoured a first move in June.

But a few, all from the bloc’s south, would still prefer an initial cut at the ECB’s April 11 meeting.

In a bid to secure a stronger consensus for a June move, some conservative policymakers floated the idea on the sidelines of the Governing Council meeting of pencilling in a second cut in July, the sources said.

An ECB spokesperson declined to comment.

The sources said no deal on such a compromise had been made and that it was merely a possibility being discussed informally as a way to maintain unity within the Governing Council.

Such a move would not be unprecedented: in December 2022 the euro zone’s central bank slowed the pace of rate hikes to 50 basis points but agreed on back-to-back moves at a steady pace to woo dissenters who favoured a bigger increase.

Financial markets now expect four ECB interest rate cuts this year, starting in June, implying cuts at all except one meeting between June and December.

The sources said the timing of its first move would also influence how a new operational framework – expected to be announced on March 13 – would be implemented.

The new framework is likely to require a narrowing of the gap between the ECB’s 4% deposit rate and 4.5% main refinancing rate, sources had told Reuters earlier.

But some policymakers fear that what is intended to be a technical adjustment could be confused for a monetary policy shift, so they want to implement it later, when the ECB is actually changing interest rates.

The sources added that tweaks to the minimum reserve requirement for banks, advocated by some policymakers in the past, are not currently part of the proposals.

(Editing by Catherine Evans)