Highlights:

• At today’s meeting the ECB’s Governing Council (GC) left its key rates unchanged, in line with expectations. How-ever, it decided to phase out full PEPP reinvestments over H2 2024 and adopted a less hawkish stance.  
• The updated staff projections lowered the near-term growth and inflation outlook. Headline inflation is expected to come back to target in 2025 and fall to 1.9% by 2026 while underlying inflation is seen as more stubborn averaging still 2.1% by 2026. Growth is expected to gain traction in 2024 again.  
• The GC adopted a more balanced tone and no longer sees inflation as “too high for too long” but only domestic price pressure to “remain elevated”. In the Q&A President Lagarde made clear that incoming wage data over the course of H1/24 will be of high importance.
• The GC decided to advance the end of full PEPP reinvestments as it “intends to reduce the PEPP portfolio by €7.5 billion per month on average” in H2/2024 and to fully stop these reinvestments at the end of 2024. The key reason provided was balance sheet normalisation, but we also sense confidence that PEPP reinvestments as a first line of defence to fight financial fragmentation will not be needed. 
• All in all we got clear signals that the ECB is about to pivot in 2024 but Lagarde tried to dent speculations about swift rate cuts. We still deem a first rate cut by June 2024 most likely.  
  
   

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