ECB signals possible June move on interest rates

European Central Bank president Christine Lagarde has indicated policymakers may be in a position to lower interest rates in June as fresh projections showed inflation hitting the 2 per cent target in 2025.

Speaking after policymakers left the deposit rate at 4 per cent for a fourth straight meeting, Lagarde said that there was a definite slowdown in consumer prices but that she and her colleagues were not “sufficiently confident” at present to commence monetary easing.

“We clearly need more evidence, more detail,” she told reporters on Thursday in Frankfurt, highlighting upcoming figures on wages. “We know that this data will come in the next few months. We will know a little more in April, but we will know a lot more in June.”

The ECB, like the Federal Reserve and the Bank of England, is contemplating when to sound the all-clear on inflation and begin undoing the unprecedented monetary tightening deployed to subdue it. While price growth in the 20-nation euro zone is nearing the target, officials there are wary of cutting too soon and want assurance that wage increases are under control.

The ECB’s latest quarterly outlook offered strong encouragement, putting inflation at 2.3 per cent this year – down from 2.7 per cent in December – and revising the 2025 forecast down to 2 per cent. For 2026, it’s still seen at 1.9 per cent.

The economy, meanwhile, is predicted to expand by 0.6 per cent in 2024 compared with 0.8 per cent previously.

The updated inflation projections will underpin investor expectations that a first rate cut will arrive in June. Markets are now pricing a full percentage point of ECB easing in 2024, while economists reckon there will be three cuts.

While policymakers are more confident that inflation is receding sustainably, most agree with Lagarde that it’s too soon to declare victory and want to see more data backing the retreat before giving the green light for monetary loosening.

“We did not discuss cuts for this meeting,” Lagarde said. “But we are just beginning to discuss the dialling back of our restrictive stance.”

Earlier on Thursday, an ECB statement left interest rates unchanged as expected although it acknowledged that inflation is easing more quickly than once thought, potentially opening the way for rate cuts later this year.

This held borrowing costs at record highs since September with the ECB so far batting 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 its 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 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 come only 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. – Bloomberg, Reuters