The European Central Bank left interest rates unchanged in March. The committee keeps pointing at a first rate cut in June.
The European Central Bank left interest rates at a record-high 4% at its meeting on Thursday. This move was widely expected by markets, with European stocks climbing in the morning ahead of the announcement.
The ECB statement was mostly similar to that of January, with the recognition that inflation is tumbling in the Eurozone but caution is still very much required. “Although most measures of underlying inflation have eased further,” the statement reads, “domestic price pressures remain high, in part owing to strong growth in wages.”
However, inflation prospects improved since the latest meeting. The ECB now forecasts Eurozone inflation to fall to 2.3% this year, instead of the 2.7% previously predicted. If this trend continues, inflation could fall to the 2% target within this year instead of 2025.
EU prices fell to 2.6% in February, following previous market expectations. Core inflation, a preferred measure for the ECB, remained high at 3.1%
On the other hand, GPD growth for the 20 countries sharing the euro is projected at 0.6% instead of the 0.8% forecast in January.
ECB President Christine Lagarde expressed confidence inflation will come down, but still wants to see a clear path ahead. The committee needs more data, Lagarde said, before considering a rate cut.
Economic growth vs caution
The committee is therefore mostly aligned with markets, which price with absolute certainty the first cut in June. Markets believe there is still a small likelihood of an April cut, though it will all depend on February and March’s data.
Following the Covid pandemic and the Russian invasion of Ukraine, Europe was overwhelmed by an inflationary wave. Though prices have cooled down in most of the continent, some Eastern European countries still suffer double-digit inflation.
This pushed the European Central Bank to bring interest rates to the highest levels in the euro’s history. In turn, the monetary tightening halted the continent’s economic growth. A similar course of events took place in the United Kingdom, where inflation is still at 4%, causing a technical recession in early 2024.
Lagarde and the committee are now pressured to bring interest rates down. The ECB, however, urges caution. The most hawkish members of the committee believe it’s better to wait than cause inflation to edge up again.
Robert Holtzmann, one of the most hawkish members of the ECB, believes the committee should raise rates after the Federal Reserve. But as the Fed postpones rate cuts to Q3, this prospect appears increasingly unlikely.
