European Central Bank holds interest rates at 4% in split decision

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The European Central Bank kept interest rates at record lows on Thursday, signaling that it plans to cut them at its next meeting in June.

The ECB said after its governing council meeting in Frankfurt that its benchmark rate on deposits would remain at 4 percent until policymakers were sure that price pressures had stabilized.

But some policymakers favored an immediate reduction.

Contrary to its previous comments, the ECB said it “would be appropriate” to cut rates if underlying price pressures, its updated forecasts and the impact of previous rate hikes strengthen its confidence that inflation was approaching its 2% target “in a sustained manner”.

Euro zone inflation fell from a peak of 10.6 percent in 2022 to 2.4 percent in March, very close to the bank’s target.

“Even though the policy announcement does not explicitly mention June as the time for a first rate cut, we believe today’s meeting should mark the last step before the cut,” said Carsten Brzeski, head of research. global macroeconomics at the Dutch bank ING.

ECB President Christine Lagarde told reporters that inflation is likely to “fluctuate” in the coming months before falling to its target by mid-2025, but pointed to signs of slowing growth wages, adding: “The risks for economic growth remain tilted to the downside. »

Asked if Thursday’s decision to keep rates unchanged was unanimous, she said “a few members felt confident enough” to argue for a cut. But she added that they “agreed to join the consensus of the very, very large majority of members” who wanted to wait until June.

The euro, interest-rate-sensitive two-year German Bund yields and the Stoxx Europe 600 index were all roughly flat the day after the central bank’s statement.

However, traders in swap markets have slightly revised down the likelihood that the ECB will start cutting rates in June to around 70 percent, from 75 percent earlier in the day.

Market expectations for rate cuts were dented by data this week showing U.S. inflation rose more than expected in March.

Investors responded by sharply reducing their bets on a Federal Reserve rate cut, to which they now give only a 50 percent chance before September.

Market movements in the United States have also led traders to lower their expectations for the number of rate cuts the ECB and Bank of England will make over the course of the year.

Some eurozone policymakers, such as in the U.K., may want to avoid cutting rates much more aggressively than their U.S. counterparts, partly out of fear of weakening their currencies and thereby fueling further inflation.

But Lagarde opposed the suggestion that the ECB would not be ready to cut rates before the Fed. “We depend on the data, not the Fed,” she said.

Peter Schaffrik, strategist at RBC Capital Markets, added: “The ECB has clearly shown its colors and changing its guidance at this stage, when actual inflation figures are currently not far from their own forecasts, seems difficult to imagine.”