The European Central Bank headquarters, in Frankfurt, Germany, on Jan. 25.KIRILL KUDRYAVTSEV/Getty Images
The European Central Bank held interest rates at a record-high 4 per cent on Thursday and reaffirmed its commitment to fighting inflation even as the time to start easing borrowing costs approaches.
The ECB ended its fastest-ever cycle of rate hikes in September and it has been adamant, including on Thursday, that it is too soon to discuss a reversal, since price pressures have not been fully extinguished and many wage negotiations have yet to conclude.
“The consensus around the table was that it was premature to discuss rate cuts,” ECB president Christine Lagarde told her regular news conference following the decision, insisting that future decisions would depend on incoming data.
“We need to be further along the disinflation process to be confident that inflation will be at target – sustainably so.”
Policy makers speaking on condition of anonymity after the meeting said they were open to a change in rhetoric at their next meeting, paving the way for an interest-rate cut possibly in June, if upcoming data confirms inflation has been vanquished.
In a possible sign that the tone was starting to change a reference in previous statements to elevated domestic price pressures and strong labour cost growth had been taken out on Thursday.
“The wording on inflation expressed higher confidence in the downward path than at the last meeting,” Martin Wolburg, a senior economist at Generali Investments, said.
“Given the cautiously dovish tone of today’s meeting the risk of a cut before June has increased somewhat.”
Ms. Lagarde had however cautioned against overinterpreting such omissions and urged observers to focus more on what content was left in the statement.
Investors are betting that the ECB is getting it wrong on both growth and inflation and will be forced to U-turn and deliver five rate cuts in rapid succession from early spring, with bets on an April rate cut increasing after Lagarde’s press conference.
The discrepancy in rate expectations stems from a different outlook on growth and how much past rate hikes are slowing economic activity across the 20 countries that use the euro currency – not least in Germany, where the closely watched Ifo survey pointed to worsening business sentiment.
“Germany is in absolute hole with no prospect of getting out of it, and yet the ECB seem more worried about inflation than they are about a depression,” said Michael Hewson, chief market strategist at CMC Markets in London.
The euro zone was probably in recession last quarter and got off to a slow start in January, making the current quarter the sixth in a row with broadly flat or negative growth. A long-predicted recovery meanwhile keeps getting pushed further out.
A weak economy, along with muted commodity prices and high interest rates, should keep stifling inflation, which stood at 2.9 per cent in December and is not currently expected by the ECB to fall back to its 2-per-cent target until 2025.
The ECB expects household and government spending to drive a recovery but data appear to be painting a bleaker picture, with manufacturing remaining in recession and services cooling.
Ms. Lagarde said growth risks were tilted to the downside and included the restrictive effect of monetary policy, wars in Ukraine and the Middle East and a global economic downturn.
Disruptions to trade from attacks by Yemen’s Houthi group on shipping in the Red Sea could add to inflation by pushing up energy and freight costs, she warned.
“We are observing it very carefully,” Ms. Lagarde said.
Ms. Lagarde and ECB chief economist Philip Lane have recently pointed to first-quarter wage settlements, for which figures become available in May, as a relevant gauge, which some have seen as a clue to a first move in June.
“Our view is that June remains the most likely timing for a cut,” economists at Investec said.
Ms. Lagarde brushed aside such speculation. She pointed to signs that demand for labour was easing and evidence that moderating wage growth was “directionally good from our perspective.”