ECB: Rates Unchanged, Possible Cut in June

Frankfurt left borrowing costs unchanged for the fifth time after 10 consecutive increases

As expected, the European Central Bank (ECB) left interest rates unchanged again; they are holding at an all-time high. However, signs of future reductions, probably as early as June, have reappeared. This is the fifth pause after ten consecutive increases; interest rates on core refinancing operations, marginal refinancing operations, and central bank deposits thus remain at 4.50%, 4.75%, and 4.00%, accordingly.

“The new information essentially confirmed the previous assessment of the medium-term inflation outlook. Inflation continues to slow, primarily as a result of a more subdued price trend in trading food and other commodities,” the ECB said in a press release. “Core inflation rates are mostly falling, wage growth is gradually slowing, and businesses are absorbing some of the increase in labor costs along with their profits. Funding conditions remain restrictive, and previous interest rate hikes continue to affect demand, helping to dampen inflation. However, domestic price pressures are strong and support high services inflation. The Board of Governors is determined to ensure the timely return of inflation to its 2% medium target.”

However, compared to the past, there is no unanimity among the governors. The Frankfurt Institute’s tone changed slightly, specifying that under certain conditions “it would be feasible to reduce the current level of monetary policy constraints.” There are three main conditions: greater confidence in inflation approaching 2%, the dynamics of core inflation, and the intensity of transmission monetary policy. If these parameters remain satisfactory at the next review in June, there could be a first cut of 25 basis points. According to analysts, there could be three reductions of this magnitude in 2024.

However, ECB President Christine Lagarde said: “We are not committing in advance to a particular rate trajectory.” She reiterated that decisions will be dictated by observation of indicators.