Eurozone interest rates put on hold

Sticky inflation is expected to prompt eurozone rate-setters to hold borrowing costs steady again on Thursday, as they await clearer signs of a sustained easing of consumer prices before beginning to cut.

Costs of everyday goods surged following Russia’s invasion of Ukraine and amid pandemic-related supply chain woes, prompting the European Central Bank (ECB) to launch a historic rate hiking cycle.

Inflation, which peaked at over 10 percent in late 2022, has been steadily easing, hitting 2.6 percent in February, heading toward the ECB’s 2-percent target.

At the same time, the outlook is bleak, with the eurozone narrowly dodging a technical recession in the second half of 2023, weighed down by a poor performance in its biggest economy, Germany.

Slowing inflation and a worsening economy should bolster arguments for rate cuts. But consumer price rises are not slowing as quickly as hoped, and the ECB is worried about completing the “last mile” to reach its target.

The Frankfurt-based institution’s governing council is widely expected to hold the benchmark deposit rate steady at a record 4 percent for a fourth straight meeting on Thursday.

“We don’t think the ECB will be confident enough that the eurozone has gone far enough ‘along the disinflation process’ ... even to discuss rate cuts, let alone signal that one is imminent,” said HSBC in a note.

Still, the meeting will be closely watched for clues on when the ECB will start cutting borrowing costs, with most investors now betting on a first move in June.

Vital to their calculations will be the bank’s updated forecasts due to be released alongside the rate decision, with a slight downward revision expected for this year’s gross domestic product growth as well as inflation.

‘Next move is down’

Analysts believe the drivers of inflation have shifted from energy costs, which surged after Russia invaded Ukraine in 2022, to inflation in the services sector and wage growth.

“Wage growth remains elevated with little sign of a rapid turnaround yet, fueling the stickiness in services inflation,” said Frederik Ducrozet, chief economist at Pictet Wealth Management.

Heightened geopolitical tensions in the Middle East have also added to worries that inflation could rebound.

Yemeni rebel attacks on Red Sea shipping have prompted shipping companies to avoid the vital trade route, while a spillover of the Israel-Hamas war could impact oil prices.