ECB holds rates at record high, signals incoming cut
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The news: The European Central Bank held rates at a record high on Thursday and indicated that it is getting closer to rate cuts, despite the road to monetary easing by the US Federal Reserve becoming less clear.
The numbers: The ECB’s interest rates on the main refinancing operations, the marginal lending facility, and deposit facility remain unchanged at 4.50%, 4.75% and 4.00% respectively.
The context: The ECB explained that if its inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further “increase our confidence that inflation is converging to our target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction.”
While the central bank reaffirmed its goal to ensure that inflation returns to its 2% target, it explained that its expects inflation to “fluctuate” around current levels in the coming months before declining to its target in 2025. This timeline owes to weaker growth in labour costs, the unfolding effects of the ECB’s restrictive monetary policy, the fading impact of the energy crisis and the pandemic.
After hotter than expected US inflation figures for March were released yesterday, investors are hedging their bets on a June rate cut from the US Federal Reserve. During a press conference on the rates decision, ECB President Christine Lagarde insisted that the EU is on track to cut rates in June, regardless of what the US Fed decides to do: “We are not Fed dependent,” Lagarde asserted.
When asked whether the decision to hold rates steady was unanimous, Lagarde said that “a few members felt sufficiently confident to argue in favour of a rate cut,” but that they “agreed to rally to the consensus of the very, very large majority of members” who wanted to wait at least until June.
The sources: ECB press release, Financial Times
