The European Central Bank left interest rates unchanged as expected on Thursday but acknowledged that inflation is easing faster than once thought, potentially opening the way for rate cuts later this year.
The ECB has held borrowing costs at record highs since September and has so far batted back any call for a rate cut, even if policymakers are now openly acknowledging that such a move is coming and only the timing is up for debate.
“Inflation (projections have) been revised down, in particular for 2024 which mainly reflects a lower contribution from energy prices,” the ECB said in a statement.
The more benign outlook comes as the bank lowered its inflation projections for the second consecutive quarter, putting price growth at 2.3 per cent this year and at its 2 per cent target next year.
Inflation has been on a downward trend for months as energy prices dip and the 20-country euro zone economy stagnates for the second year in a row.
But underlying price pressures, particularly from wages in the bloc’s vast services sector, remain uncomfortably high, raising the risk that price trends could reverse.
That is why the ECB has insisted that rate cuts will only come once the bank is sure that wage restraint is becoming established and the inflation slowdown is durable.
“Although most measures of underlying inflation have eased further, domestic price pressures remain high, in part owing to strong growth in wages,” the bank added.
Investors see a total three or four rate cuts this year with the first move in June, taking the 4 per cent deposit rate down to 3.25 per cent or 3 per cent by December.
While only a few policymakers have discussed specific dates for a first rate cut, several have mentioned June and others have said any move should come only after crucial wage data becomes available in May.
Attention now turns to ECB president Christine Lagarde’s press conference on Thursday afternoon where she will be quizzed about the timeline of ECB policy moves and the triggers for action. – Reuters
