ECB holds interest rates but hints at future cuts

The European Central Bank is holding the interest rate at 4%, the highest in central bank’s history, but dropped the clearest hint yet that it may be gearing up for a cut at its next meeting.

"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.

This is the first time in the current cycle that the ECB has talked about rate cuts in its official policy announcement, Dutch bank ING.

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"Even if the policy announcement does not explicitly mention June as the moment for a first rate cut, we think that today’s meeting should mark the final stop before the cut," ING’s Carsten Brzeski said.

"In fact, the ECB has gone through a very gradual transition of its communication since December, turning from hawkish to dovish. The faster-than-expected drop in headline inflation, as well as anaemic growth, have opened the door for some rate cuts. Not a full reversal of the rate hikes since July 2022, but rather a soft loosening of a still restrictive stance," he added.

It was the fifth consecutive decision to leave rates untouched as inflation closes in on the central bank’s 2% target.

The central bank for the 20 countries that share the euro currency hiked its key rate to a record 4% in September. It has left this rate unchanged at every gathering since.

ECB policymakers have been lining up behind a rate reduction at their June 6 meeting, provided key indicators including wage growth and underlying inflation continue to moderate.

Last month, inflation in the eurozone slowed to 2.4%, close to the 2% target.

June will also be the first month when policymakers will have a full set of data on first quarter wage negotiations.

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Richard Carter, head of fixed interest research at Quilter Cheviot, explains that the ECB could be the first of the world’s largest central banks to start cutting rates in the current

"The European Central Bank has predictably opted to hold rates once more. While for the first time it has signalled a clear intention to begin cutting rates if inflation continues to head in the right direction, which could potentially come as soon as June, it stopped short of pre-committing to this," he said.

"Inflation appears to be better behaved and less sticky in the Eurozone than it has been elsewhere, particularly when compared to the US where just yesterday we saw another unwanted uptick which took headline inflation to 3.5%. Given the Federal Reserve is now expected to resist making any cuts for some time yet, and the Bank of England faces a difficult balancing act, the ECB could well be the first to make a move," he added.

ECB president Christine Lagarde acknowledged changes in the US economic outlook but said conditions in the eurozone were different.

"The two economies are not the same, the political regimes are not the same, the fiscal policies are different," she said.

“We are data-dependent, not Fed-dependent,” she added.

Lagarde also revealed that “just a few” members of the Governing Council believed it was already time to loosen policy but had agreed to rally to the consensus to wait.

Meanwhile, International Monetary Fund (IMF) managing director Kristalina Georgieva said high inflation across advanced economies was “not fully defeated” and could require a longer wait before reducing borrowing costs, amid concerns over stubbornly high inflation on both sides of the Atlantic.

“On this final stretch, it is doubly important that central banks uphold their independence,” Georgieva said, urging policymakers to resist calls for early rate cuts when necessary.

“Premature easing could see new inflation surprises that may even necessitate a further bout of monetary tightening. On the other side, delaying too long could pour cold water on economic activity,” she added.

Watch: What to expect on European interest rate decision day

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