THE European Central Bank (ECB) kept borrowing costs at record highs on Thursday (Mar 7) but took a first, small step towards lowering them, saying inflation was easing faster than it anticipated only a few months ago.
The ECB is not yet “sufficiently confident” on progress being made on reducing inflation towards its two-per cent target, president Christine Lagarde said.
“We are making good progress towards our inflation target…. but we are not sufficiently confident,” she told a press conference, adding that “we will know a lot more in June”. Many analysts expect the ECB to start cutting rates that month.
Having underestimated a sudden surge in prices two years ago, the central bank for the 20 countries sharing the euro has been reluctant to declare victory over what turned out to be the most brutal bout of inflation in decades.
Leaving its main interest rate unchanged at 4.0 per cent as expected, the ECB tweaked its message slightly to reflect a continued fall in inflation over the past 1½ years and new, lower economic projections.
“Since the last Governing Council meeting in January, inflation has declined further,” the ECB said in a statement. “Although most measures of underlying inflation have eased further, domestic price pressures remain high, in part owing to strong growth in wages.”
Having managed to talk traders out of betting on a rate cut in early spring, the central bank studiously avoided making any promises on Thursday.
It reaffirmed instead that future decisions would partly depend on the path of underlying inflation, which strips out more volatile prices and has proven particularly stubborn.
Sources have been telling Reuters for months that the ECB is unlikely to reduce borrowing costs before its June 6 meeting as crucial data about wages will only become available in May.
This gives the ECB another meeting – on April 11 – to explicitly open the door to what ECB chief economist Philip Lane has said is likely to be the first in a series of rate cuts.
Investors have pencilled three or four cuts to the 4 per cent rate the ECB pays on bank deposits this year, taking it to 3.25 per cent or 3.0 per cent.
In its quarterly economic projections, the ECB cut its forecast for inflation this year from 2.7 per cent to 2.3 per cent. That could mean the central bank hits its 2 per cent goal this year, rather than in 2025 as it has expected.
Inflation has been coming down for nearly 18 months and it was 2.6 per cent in February.
This was partly the result of a steep fall in fuel costs, which had been boosted by Russia’s invasion of Ukraine, but also reflected the ECB’s steepest ever increase in borrowing costs, which has brought lending to a standstill.
But underlying inflation excluding volatile food and fuel prices was still at 3.1 per cent and an index for the price of services, which are closely linked to wage growth, rose by nearly 4 per cent.
“Disinflation is going much quicker than we expected on the headline level but we can’t be certain yet about core inflation because wage developments remain unclear,” ECB policymaker Peter Kazimir told Reuters in a recent interview.
His German colleague and fellow policy hawk Joachim Nagel also said the ECB should resist the temptation to make an early rate cut, and wait for wages data.
The policy tightening has taken a toll on economic growth, which has been stagnating and is likely to continue to be weak.
The ECB now expects the eurozone’s GDP to expand by 0.6 per cent compared with 0.8 per cent in its last round of projections in December.
Flagging growth and inflation has led several members of the ECB’s policymaking Governing Council, including Spanish central bank chief Pablo Hernandez de Cos, to start talking about an upcoming rate cut. Greece’s Yannis Stournaras has pointed to June as a likely date. REUTERS, AFP
