The European Central Bank (ECB) does not usually surprise, and this time has been no exception. The monetary institution has maintained the price of money unchanged this Thursday. The ECB has held this meeting with its sights set on the first rate cut, which will presumably come in June given the intense slowdown in the pace of inflation growth (or disinflation). Here you can read the statement.
Thus, the monetary institution, based in Frankfurt, has left unchanged the three reference interest rates at the March meeting. This has been the fifth meeting in which the ECB stands still since it began the cycle of rate hikes in July 2022. Since then, the institution raised the price of money in 10 consecutive meetings until last October. Now there have been five in which no action has been taken. Everything indicates that the next move is just around the corner. Here you can follow the entire ECB meeting live and Christine Lagarde’s press conference, president of the institution.
With today’s decision, expected by the markets, the deposit rate (where commercial banks accumulate their reserves) remains at 4%, the refinancing rate stays at 4.5%, the highest since 2001, and the marginal lending facility remains at 4.75%.
Small changes that say big things
With the predictable announcement that interest rates would not be changed in April, the most anticipated aspect of the ECB statement was the potential changes in the phrase in which the institution defends its monetary policy roadmap. From the phrase in the last statement in March (“interest rates are at levels that, if maintained for a long enough period, will substantially contribute to its objective”), the Governing Council has removed the “maintained for a long enough period” and has added at the end “to the disinflationary process”. This is a dovish gesture from the ECB and confirms the rate cut in June.
In addition to eliminating the reference to keeping rates at these levels for an extended period, the ECB’s statement introduced a new sentence compared to the last one that is very revealing about its next steps: “If the Governing Council’s updated assessment of inflation prospects, underlying inflation dynamics, and the strength of monetary policy transmission were to further increase their confidence that inflation is converging towards the target sustainably, it would be appropriate to reduce the current level of monetary policy restraint.” The previous statement in this regard was: “The Governing Council will continue to apply a data-dependent approach to determining the appropriate level and duration of the restraint.” This change leaves the door wide open for the first rate cut to arrive in June.
All roads lead to the first rate cut in June, a date that is on the list of all experts and analysts who follow the ECB. With the data and clues provided by the ECB, it would be very unusual for the central bank not to announce its first cut in the price of money in over four years.
This time, the European Central Bank did not provide an update on its forecasts for economic growth and inflation in the eurozone. The last time it did so was at its past meeting in March, and the Eurosystem (composed of the ECB and other euro area monetary entities) revises the macroeconomic outlook once per quarter. Therefore, it will likely not be until June when there are new developments in this regard.
Thus, the ECB has made its decision today on interest rates and the rest of its tools, considering that the rise in prices in the euro area will soften to a 2.3% average this year. The preliminary reading of the consumer price index (CPI) for March was at 2.4% year-on-year, moderating more than expected by analysts.
For 2025, the Eurosystem projects that the average CPI will be 2%. That is precisely the goal that the institution has set for itself with its monetary policy: to bring the inflation rate to around 2% in the medium term (at 2% symmetric, in technical terms). With this, it aims to comply with the European Union’s (EU) mandate to ensure price stability.
Basically, when the ECB raises interest rates, it aims to dampen demand to reduce pressure on prices and prevent them from rising further. This is what it did between July 2022 and October last year, raising them 10 times in a row and forcefully (for example, there were increases of 75 basis points at once, something that had never happened in the short history of the central bank).
Countdown to interest rate cuts
However, while the rise in the price of money was steep and fast-paced, the downward path will be more gradual: at a slow pace and there could even be pauses. This is what Christine Lagarde, the ECB president, stated three weeks ago, indicating that they cannot commit “in advance to a specific path” for interest rates, “even after the first rate cut” (which has not yet happened).
“We will not be obliged to put it on autopilot [once the cuts begin],” affirmed Martins Kazaks, governor of the central bank of Latvia (and member of the ECB’s Council), at the beginning of March. But for now, investors and analysts do not seem to believe it. Assuming that the first rate cut will be on June 6th, “a delay [in the subsequent cut] will be poorly received since the data will likely justify a move in July as well,” stated Daniel Loughney, Director of Fixed Income at Mediolanum International Funds, in a comment yesterday. “Inflation will soon return to its target,” this expert also stated, which is why he believes that “the ECB will cut rates in September, October, and December.”
The ECB will cut rates (presumably) before the Fed
If the forecasts are confirmed (both by investors and analysts), the European Central Bank will start lowering interest rates before its counterpart in the United States, the Federal Reserve (or Fed). It is not common for the guardian of the euro to take the lead, but in this case, the economic context is playing in its favor (or putting pressure on it, depending on how you look at it).
As a comparison: while the eurozone’s CPI fell to 2.4% year-on-year in March, that of the US rose (for the second consecutive month) to 3.5%, more than expected and diverging from the Fed’s target (inflation at 2% and full employment).
“Given the situation [in the United States], there will not be a rate cut in June, unless the economy quickly changes course,” stated James Knightley, economist at ING Economics, in a report yesterday. “July is also doubtful, which means September is the most likely starting point for any easing, limiting the Fed to a maximum of only three rate cuts this year,” he added.
