European Central Bank holds rates, hints at June cut as it trims inflation forecast
The European Central Bank on Thursday lowered its annual inflation forecast, as its confirmed a widely expected hold of interest rates.
ECB President Christine Lagarde, meanwhile, suggested market pricing for a June rate cut was coming into line with policymakers’ outlook.
Staff projections for inflation in 2024 were updated to an average 2.3% from 2.7%. Looking ahead, staff see inflation hitting the ECB’s 2% target in 2025 and cooling further to 1.9% in 2026.
They meanwhile updated their forecast for economic growth for 2024 to 0.6% from 0.8%, as the euro zone’s economic activity escapes its current stagnation. They then project gross domestic product expansion of 1.5% in 2025 and 1.6% in 2026, slightly weaker than the December outlook.
“We are in the disinflationary process and we are making progress,” Lagarde said during a press conference on Thursday.
“We are more confident as a result, but we are not sufficiently confident, and we need more evidence, more data, and we know this data will come in the next few months. We will know a little more in April and a lot more in June.”
Policymakers have repeatedly signaled May as a key date, since wage settlements are set to be released that month.
The ECB will be “laser-focused” on two areas of inflation that could surprise, namely wage growth and profit margins, Lagarde said. There could also be a downside surprise to the outlook if monetary policy dampens demand more than expected or the global economic environment worsens unexpectedly, she added.
Expectations ‘converging’
The announcement appeared to increase market bets on rate cuts taking place in the summer of this year, with the euro trading 0.3% lower against the British pound and bond yields falling following the news.
Market expectations have shifted to a June cut in recent weeks. Its key rate is currently 4%, up from -0.5% in June 2022, following a run of 10 hikes.
Lagarde said Thursday that market pricing “seems to be converging better” with the ECB’s own view. Policymakers were earlier this year spurred to firmly push back on market bets on cuts in March or April.
Lagarde also said Thursday that the ECB would not need to wait for headline inflation to hit its 2% target before taking a decision.
Euro zone inflation eased to 2.6% in February from 2.8% in January. However, the core figure which strips out energy, food, alcohol and tobacco proved stickier, at 3.1%.
‘Relatively dovish’
Antonio Serpico, senior portfolio manager at Neuberger Berman, said that the most likely scenario involved trims beginning in June and cuts of 25 basis points per meeting for a total of 150 basis points or more this year.
“The numbers were quite reassuring actually, we were not expecting any cut today,” he told CNBC’s Silvia Amaro.
“Today’s decision looks to be relatively dovish,” he said, given that both growth and inflation forecasts moved lower.
“That means that the ECB governing council is seeing growth as more sluggish and lower than what they saw it before… and also in terms of headline inflation and core inflation, the new projections are definitely weaker than the older ones.”
The main variable will be the stickiness of core inflation, driven by a tight job market, he added.
Core inflation projections were updated to 2.6% in 2024 from 2.7%, and to 2.1% in 2025 from 2.3%.
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