June Holds Promise for ECB's Next Move

 

To no one’s surprise, the European Central Bank (ECB) has once again decided to keep interest rates unchanged at 4%, and has sent a clearly pessimistic message.

After maintaining the deposit rate at 4% for the 4th consecutive meeting, President Christine Lagarde stated that there has been a noticeable slowdown in consumer prices. However, she and her colleagues are still not “sufficiently confident” to initiate monetary easing.

“We clearly need more evidence, more detail”, she told reporters Thursday in Frankfurt, emphasising the importance of upcoming data on wages.

“We know that this data will come in the next few months. We will know a little by April, but we will know a lot more in June.”

While the ECB expressed growing confidence in eurozone inflation, the Governing Council (GC) refrained from declaring a definitive victory. Instead, it has emphasised the importance of remaining vigilant towards various factors that influence inflation.

The main target remains 2% - similar to the Fed’s.

Lagarde suggested that policymakers may be ready to lower interest rates starting June, following fresh projections indicating that inflation could reach its target by 2025.

Market expectations have adjusted, with more than three 2024 rate cuts priced out since last year, which in turn is resulting in a more balanced market pricing landscape.

Similar to both the Fed and Bank of England (BoE), the ECB is contemplating when to signal the all-clear inflation and start reversing the unprecedented monetary tightening measures implemented to control it.

While price growth in the 20-nation eurozone is nearing the target, the ECB officials remain cautious about cutting rates prematurely and seek assurance that wage increases are manageable.