The European Central Bank held interest rates steady for a fifth meeting, while sending its clearest signal yet that cooling inflation will soon allow it to commence cuts.
The deposit rate was left at a record-high 4%, as overwhelmingly predicted by a Bloomberg poll. But the Governing Council flagged a possible reduction in its accompanying statement for the first time, contingent on its economic forecasts indicating consumer-price growth is safely headed to 2%.
“If the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction,” the ECB said Thursday.
While it said it would remain data-dependent and isn’t “pre-committing to a particular rate path,” President Christine Lagarde again signalled the prospect of a move in two months’ time.
“In April we get some information and some data,” she said, adding that “a few” Governing Council members are already sufficiently confident on inflation. “But in June, we know that we will get a lot more data and a lot more information,” including a new quarterly economic outlook.
Money markets held bets on monetary easing in 2024 roughly steady, with three quarter-point rate cuts priced in. The euro fell to its lowest level since February, down 0.3% at $1.0715.
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ECB Holds Rates for Fifth Time in a Row
Emboldened by fading inflation across the 20-nation euro area, the ECB is zeroing in on a first rate reduction since 2019 at its next meeting in June. Other central banks are less certain, with another overshoot in US consumer prices for March fueling bets that the Federal Reserve will have to wait longer to start loosening monetary policy.
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There are few such concerns for the ECB, which saw inflation fall a touch short of estimates last month, at 2.4%. While underlying pressures remain elevated and services costs are still rising by 4%, figures due in the coming weeks may confirm a moderation in the wage gains that are driving such stickiness.
Lagarde reiterated that the ECB doesn’t take its cue from across the Atlantic, while acknowledging that there are “multiple channels through which influence can be exercised” — not just exchange-rate dynamics.
“We are not Fed-dependent,” she told reporters in Frankfurt. “The United States is a very large market a very sizable economy a major financial center as well so all that finds its way into our protection.”
Rate cuts would come as a relief for Europe’s economy, which has barely registered any growth for more than a year. The latest warning came this week as the ECB’s quarterly lending survey revealed an unexpected slump in corporate loan demand at the start of 2024 — damping expectations of an imminent recovery in output.
A separate poll showed companies expect wage growth to abate over the next 12 months, with economists at Goldman Sachs predicting a significant slowdown in the second half of this year.
Lagarde said an economic recovery should emerge as slower inflation boosts real incomes, wages rise and exports pick up.
“Monetary policy should exert less of a drag on demand over time,” she said, though stressed that risks to euro-area growth remain tilted to the downside.
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“Inflation is expected to fluctuate around current levels in the coming months and to then decline to our target next year,” she said. “We’re not going to wait until everything goes back to 2% to make the decisions that will be necessary in order to make sure that inflation returns to 2% sustainably at target in a timely manner.”
Meanwhile, the debate around what happens to rates beyond June is already under way. Some of the Governing Council’s dovish members appear to want a another reduction to follow quickly, at July’s meeting. Others are more cautious, suggesting moves every quarter, when economic projections are updated.
Indeed, analysts polled by Bloomberg before the ECB’s decision lean toward such a timetable, foreseeing three cuts this year — in June, September and in December.
That may prove optimistic, according to Allianz Chief Economist Ludovic Subran, who said earlier Thursday that policymakers will have to be “very gradual.”
“Much more vibrant energy markets could mean that the ECB is maybe allowed to cut once this year and that would be also quite a drag when you look at growth forecasts,” he told Bloomberg Television. “There is this hypothesis of a rebound on real income on the second half that would be completely annihilated should we have another energy shock.”
