Policymakers from the European Central Bank on Friday rejected market expectations that interest rates in the euro zone would start to decline as early as next spring. They indicated that rates would remain high for a considerable amount of time and that, if necessary, they would even be raised again.

The European Central Bank (ECB) increased its benchmark interest rate to a record high of 4% on Thursday, but gave the impression that it would be the last time it did so because of the weak euro zone economy. Trading speculation on when it will start decreasing borrowing prices increased as a result of this.

The possibility of a future rate decrease, according to ECB President Christine Lagarde, was not even brought up by policymakers this week during their discussions.

“We have not decided, discussed or even pronounced cuts,” Lagarde told a press conference on Friday. “We will be data-dependent and as I said, level and length of time will matter significantly.”

According to Lagarde, rates will be held high for “long enough” to bring inflation back to the ECB’s 2% target. There is no set schedule for this process because choices will be taken at each meeting based on the data that comes in.

Market expectations, according to ECB Vice President Luis de Guindos, are merely bets that can quickly prove to be incorrect because policymakers will place a strong emphasis on data.

“Markets can also be wrong; they are based on a series of hypotheses that sometimes do not come true, that we will start to lower rates in June ’24,” de Guindos told Spanish radio station Cadena Cope.

“It is a bet, it may be right and it may not be right,” De Guindos added.

In the meantime, the governor of Latvia’s central bank rejected the concept that Thursday’s action was a “dovish hike” and indicated that if necessary, policy could still be tightened again.

“I’m comfortable with the current level of rates and I think we’re on track to reach 2% in the second half of 2025,” Martins Kazaks told Reuters on the sidelines of a meeting of European Union financial policymakers in Santiago de Compostela, Spain.

“But if the data tells us that we need another hike, we’ll do it.”

The ECB stated on Thursday that it believes interest rates “have reached levels that, maintained for a sufficiently long duration” would help bring inflation back to target.

Gediminas Simkus, a legislator from Lithuania, said he hoped the ECB had stopped rising interest rates.

“I want to hope that this is the final medication dose, the final increase of 25 basis points.”

German Finance Minister Christian Lindner said the ECB’s decision to raise rates was “understandable” and that it was his government’s responsibility to help the central bank by maintaining “a moderately restrictive fiscal policy”.

Money markets are already putting in a slim possibility of an ECB rate drop as early as April and fully anticipate a fall of 25 basis points by July.

“Markets have to take a position but (an April rate cut) is inconsistent with our macro scenario,” Kazaks said. “We’ve clearly said we’ll stay in restrictive territory for as long as necessary to get inflation to 2%.”

The ECB will need to decide whether to withdraw some of the funds it injected into the banking system over a decade of too-low inflation through a series of bond-buying programmes before rates can be lowered.

“There is excess liquidity that has to be removed and we’ll have to discuss it,” Kazaks added said. “It has to happen before rates are cut.”

(Adapted from Investing.com)

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