After its fourth meeting, the European Central Bank held interest rates steady, supporting expectations of rate decreases beginning in June despite a weaker outlook for inflation and economic growth.

As per the predictions of every economist surveyed by Bloomberg, the deposit rate was maintained at a record 4%. The Governing Council restated that keeping borrowing costs at this level for a “sufficiently long” period of time will “substantially contribute” to getting consumer price increase back to the targeted 2% rate.

“The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction,” the ECB said Thursday in a statement. “Although most measures of underlying inflation have eased further, domestic price pressures remain high, in part owing to strong growth in wages.”

After the ECB’s statement, traders increased their wagers on monetary easing; they now anticipate a full percentage point of rate reductions in 2024 as opposed to the previous projection of roughly 93 basis points. While the yield on German 10-year notes was six basis points lower at 2.26%, the euro fell 0.2% to $1.0874.

Like the Federal Reserve and the Bank of England, the ECB is debating when to declare inflation under control and start removing the extraordinary monetary tightening that was used to contain it. The 20-nation euro zone’s price growth is approaching the objective, but authorities there are hesitant to reduce too fast and want proof that wage increases are in check.

Inflation is predicted to reach 2.3% this year, down from 2.7% in December, according to their most recent quarterly outlook. The 2025 prediction is revised down to 2%. In contrast, the economy is predicted to grow by 0.6% in 2024 as opposed to 0.8% in the past.

President Christine Lagarde will address the media at 2:45 p.m. in Frankfurt; however, due to strikes in Germany, a number of officials were forced to attend this week’s meeting virtually.
Investors will be watching Lagarde to see whether she gives any indications about the viability of first-rate cuts in June. She might also be questioned on a long-running argument about debate freedom and climate policy with ECB employees.

The bulk of authorities had been focusing on June, even if some wanted to move faster quickly since the continent’s economy has been in a state of stagnation for more than a year.

Because of this, a lot of politicians also wish for more lenient banking regulations. “Rate cuts could help boost growth, which is low across Europe,” Giancarlo Giorgetti, the finance minister of Italy, stated last week. “I believe I’m not alone in holding this opinion.”

Even if policymakers are increasingly certain that inflation is declining stably, most believe it is too soon to declare success and want to wait for additional evidence to support the retreat before approving monetary easing.

With inflation in February coming in somewhat higher than anticipated at 2.6%, this figure supports those who are hesitant to quickly cut interest rates. However, a Nowcast collected by Bloomberg Economics indicates that March inflation was 2%, indicating that the ECB may be closer to its objective than previously believed.

Even still, before taking any action, the majority of policymakers want to review the steady stream of wage statistics that will be released over the next few months. Even doves like Yannis Stournaras of Greece are among them; he recently stated that the ECB “won’t have enough information” to make a decision on cuts until June.

“It is not expected that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably towards 2%,” according to the US Federal Reserve Chair, Jerome Powell. 

Similar to the Bank for International Settlements, caution is called for. This week, the bank issued a warning, stating that the present dominance of services in total price increases may result in more persistent inflation and the need for tighter policy.

(Adapted from LiveMint.com)

Categories: Economy & Finance, Strategy, Sustainability, Uncategorized