European Central Bank signals coming rate cut

Move may come in June and breaks from Federal Reserve

The European Central Bank gave its clearest signal yet Thursday that it might lower interest rates at its next policy meeting, in June.

The indication that European policymakers would push ahead with rate cuts in the next few months as inflation slows and the region's economy languishes opens up a divergence with the United States, where price pressures are still relatively hot.

The ECB, which sets interest rates for the 20 countries that use the euro, held rates steady, keeping the deposit rate at 4%, the highest in its history. It was the fifth consecutive decision to leave rates untouched. But officials added that if incoming data — on consumer prices and the effect of past rate increases — gave them more confidence that inflation was on a sustainably lower path, they would start pulling back the restrictive policy stance.

“In June, we know that we will get a lot more data,” Christine Lagarde, president

of the bank, said at a news conference in Frankfurt, Germany.

Officials will look at that data and new economic forecasts for the eurozone and “determine whether all of that confirms that inflation returns to target in a sustained manner,” she said. They are waiting to have their confidence reinforced, she added.

A few members of the 26-person Governing Council were ready to begin lowering rates at this week's meeting, Lagarde said, but they joined the consensus, which preferred to wait for more information.

Central bankers on both sides of the Atlantic have been trying to work out the delicate timing of when to loosen their policy. They don't want to keep rates higher longer than necessary and hurt their economies. At the same time, they don't want to ease too soon and revive price pressures. Considerable progress has been made in bringing inflation down from its multidecade highs in late 2022, but returning inflation all the way to their targets, typically 2%, is expected to be a bumpy process.

In the eurozone, “inflation is expected to fluctuate around current levels in the coming months and to then decline to our target next year,” Lagarde said, as wage growth slows and the impact of the pandemic and energy crisis continues to fade.

Last month, inflation in the eurozone slowed to 2.4%, closing in on the central bank's target. Policymakers, wanting to be sure that price growth stays low, have focused on core inflation. That number better reflects domestic price pressures because it excludes volatile energy and food prices, which are heavily influenced by global prices. In March, core inflation slowed to 2.9%, more than economists expected.

Lagarde warned Thursday that inflation in the services sector was still high, evidence that some price pressures were still persistent in the bloc. The central bank has also been watching wages, considered a sticky source of services inflation. Officials expect to get more data on annual wage negotiations by the June policy meeting.

So far, wage pressures are easing as hoped. The central bank said Thursday that wage gains were “gradually moderating” while companies were absorbing some of the cost of higher wages in their profits, rather than passing them on to customers.

Investors are betting heavily that the ECB will cut rates three times this year, starting in June.

By comparison, inflation in the United States has come in hotter than expected for three months in a row, upending expectations that the Federal Reserve might start cutting rates this summer.

“That the ECB goes first is unusual,” analysts at Berenberg bank said a note. “But the difference in current economic performance more than justifies that.”

On Wednesday, data showed the U.S. consumer price index rose to 3.5% in March, up from 3.2% the previous month. Investors quickly reduced their bets on rate cuts, pushing up yields on government bonds, which affects borrowing costs.