ECB holds rates, puts cut in view
The European Central Bank held interest rates at a record high as expected on Thursday but signalled it may soon start to cut them, even as investors question whether stubborn US inflation will stop the Federal Reserve from following close behind.
The ECB has kept borrowing costs steady since September but has long signalled cuts were coming into view, with policymakers awaiting a few more comforting wage indicators to accompany benign inflation figures before pulling the trigger.
Despite Wednesday’s hotter-than-expected US inflation print, the ECB underlined that message with new wording in its regular statement on policymakers’ deliberations.
“If the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction,” the ECB said.
In her press conference, ECB President Christine Lagarde acknowledged the relevance of developments in the US economy — the world’s largest — to its policy-setting but also stressed that conditions in the euro zone were different.
“I don’t think you can draw conclusions ... based on the assumption that the two inflations (eurozone and US) are the same. They are not the same,” she said. “We are data-dependent, not Fed-dependent,” Lagarde added.
Lagarde said that “just a few” members of the Governing Council believed it was already time to loosen policy but had rallied to the consensus to wait. She said the central bank for the 20 countries that share the euro would have more information and issue new inflation and growth projections in June.
Earlier, the ECB said incoming information broadly confirmed its previous inflation assessment, while wage growth was moderating and firms were absorbing more of the labour cost increases via their profit margins.
Nevertheless, domestic price pressures were strong and keeping services price inflation high, it noted.
Analysts believe the biggest complication could be if the Federal Reserve delays its own policy easing to maintain the battle against inflation. The US central bank generally sets the tone for global financial markets.