The European Central Bank (ECB) has maintained interest rates unchanged for the fifth consecutive time but has sent a clearer signal that rate cuts could be on the horizon.
On April 11, the ECB announced its April rate decision, keeping its three main interest rates steady as anticipated. The main refinancing rate, deposit facility rate, and marginal lending rate remain at their historical highs of 4.5%, 4%, and 4.75%, respectively.
Since mid-2022, the ECB has raised the deposit rate to 4% through ten consecutive rate hikes and has now kept the rates steady for the fifth time in a row.
Notably, the ECB hinted at the possibility of lowering interest rates, stating that most indicators of potential inflation are slowing down. If the inflation rate is believed to reach 2%, interest rates might decrease, sending a clearer signal for potential "rate cuts."
Following the ECB's announcement, traders' expectations for the scale of the ECB's rate cuts remained steady, with a 19 basis point cut anticipated by June.
The Euro fell slightly against the U.S. dollar, and European stocks continued to decline.
The ECB pointed out that inflation is slowing, laying the groundwork for possible future rate cuts. The bank noted that inflation continues to decline, primarily due to decreases in food and commodity price inflation. Most core inflation indicators are slowing, and wage growth is also gradually decreasing. Current price pressures have kept service price inflation at a high level.
If confidence grows that inflation will fall to 2%, interest rates might be reduced, the ECB indicated. It also noted that strict financing conditions are putting pressure on demand.
Analysts had previously argued that with inflation sharply slowing and the economy continuing to weaken, conditions were ripe for the ECB to begin cutting rates, with a consensus that the bank would start reducing rates by June.
The ECB reiterated in this meeting its determination to ensure inflation returns to 2% in a timely manner, stating that it does not pre-set a specific interest rate path. It will continue to take a data-dependent and meeting-by-meeting approach to determine the appropriate level and duration of restrictive interest rates.
Regarding asset purchases, the ECB reaffirmed plans to begin reducing the portfolio of its emergency pandemic purchase program (PEPP) in the second half of the year, reducing it by an average of 7.5 billion euros per month, intending to end reinvestments under the PEPP by the end of 2024.
Additionally, the ECB stated it would regularly review the contribution of targeted longer-term refinancing operations (TLTROs) to its policy stance.
Analysts expressed cautious optimism about rate cuts. Jana Randow commented on the ECB's rate decision, stating that the policy statement was intriguing and that the ECB was preparing for rate cuts. The ECB's latest information largely confirmed their inflation expectations.
Deutsche Bank suggested the likelihood of consecutive rate cuts by the ECB might have decreased, with economist Mark Wall remarking that the ECB is becoming increasingly optimistic that conditions for policy relaxation are forming. After today's decision to keep rates unchanged, a rate cut in June would not surprise anyone.
However, the question remains whether the ECB's cautious stance on domestic inflation reduces the likelihood of consecutive rate cuts in June and July. The ECB's monetary policy statement mentioned strong domestic price pressures, keeping service price inflation high, indicating that the pace of policy easing would be more gradual.
Some analysts remain uncertain about the ECB's future rate path. Alexander Weber noted that it was challenging to infer from the ECB's policy statement where rates might head after the initial cut. The ECB explicitly stated it "does not pre-commit to any particular interest rate path," echoing comments made by President Lagarde last month. The President might still face many questions on this issue.
