On Hold. The outcome of the April governing council meeting should be pretty straightforward, as the governing council will not have updated forecasts. We expect communication to remain largely unchanged and defer the real discussion to the June meeting.
Having said that, looking at the data and the models, the issues remain the same: it is hard to see core HICP averaging 2% going forward (rather than remaining above target). For this reason, we continue to remain very prudent.
Main points:
The incoming data on core HICP have been a bit higher than the latest ECB macroeconomic projection exercise. We estimate that core HICP prices are currently running around 2½ at annual rate, with strong services readings (around 4% sequential at annual rate).
Figure 1. Evolution of cumulative (unchained) core HICP by year.
The main model medium-term forecast is little changed compared to the March round. The “main” model forecast is little changed, as the incoming data have been in line with the model forecast. The model forecast is slightly above the March ECB/NCBs projection and remains a bit higher than target at the end of the medium-term.
Figure 2. Current vs previous GC round “main” model medium-term forecast of core HICP.
Note: the figure shows the model forecast of core HICP (YoY) in the current round (left panel) and the previous GC round (right panel). The red shadowed areas show the intervals of confidence from the estimated parameters distributions.
Model forecast in line with the ECB/NCBs staff projection. The “main” model anticipates well the evolution of the ECB/NCBs staff forecast of core HICP. Compared to the previous forecast, the current forecast of the model is little changed. The model forecast is in line with the latest ECB/NCBs forecast.
Figure 3. Evolution of core HICP inflation forecast: “main” model vs ECB/NCBs staff forecast.
Note: the figure shows the evolution of the core HICP inflation forecast of the “main” model (yellow lines) vs ECB/NCBs staff forecast (blue lines). All figures are annual averages in each year. The x-axis refer to the dates of the GC meetings with new ECB/NCBs staff projections.
The Taylor rules imply 2-6 cuts in 2024 depending on the degree of inertia. The inertial Taylor rules conditional on the degree of inertia consistent with the observed path of the ECB deposit rate imply 2 cuts in 2024. The non-inertial Taylor rules imply up to 6 cuts. This is unchanged compared to the March round.
Figure 4. Taylor rules
