Autopilot. The outcome of the January governing council meeting should be pretty straightforward, as the data came in as expected and the models forecasts are nearly identical to the December round.
For this reason, we expect no surprises from the January governing council meeting. In our view, communication should be in line with December. The policymakers know that the data are cooperating but cannot turn fully dovish because the models are still not converging to target.
Main points:
The incoming data on core HICP have been in line with the latest macroeconomic projection exercise. Core HICP prices came in exactly as (we) expected in December. More evidence is needed in early 2024 but disinflation now looks on track.
Figure 1. Evolution of cumulative (unchained) core HICP by year.
The main model medium-term forecast is little changed. The “main” model forecast is nearly identical to the time of the December GC meeting. The forecast is now in line with the 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 latest forecast, the current forecast of the model is little changed.
The model forecast is slightly lower than the ECB/NCBs forecast in 2025.
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 (i) the degree of inertia consistent with observed path of the ECB deposit rate, and (ii) on a forecast for core inflation as in the “main” model suggests that the deposit rate might be cut twice in 2024. Non inertial Taylor rules suggest 5-6 cuts. This is also unchanged compared to last round.
Figure 4. Taylor rules
