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.

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%.