The European Central Bank gave its clearest signal yet on Thursday that it may lower interest rates at its next policy meeting, in June.
Indications that European policymakers will continue with rate cuts in the coming months as inflation slows and the region’s economy weakens open a contrast with the United States, where price pressures is still quite warm.
The ECB, which sets interest rates for the 20 countries that use the euro, kept rates steady, keeping the deposit rate at 4 percent, the highest in its history. This is the fifth consecutive decision to leave rates unchanged. But officials added that if incoming data — on consumer prices and the impact of previous rate hikes — gave them more confidence that inflation was on a sustainable lower path, they would begin to pull back. the strict stance on the policy.
“In June, we know we will get more data,” Christine Lagarde, the bank’s president, said at a news conference in Frankfurt.
Officials will look at that data and the new economic forecasts for the eurozone and “determine whether all that proves that inflation is back on target in a sustainable way,” he said. They are waiting to boost their confidence, he added.
Some members of the 26-person Governing Council are ready to start lowering rates at this week’s meeting, Ms. Lagarde, but they joined the consensus, preferring to wait for more information.
Central bankers on both sides of the Atlantic are trying to work out the delicate timing of when their policy will ease. They don’t want to keep rates higher than necessary and hurt their economies. At the same time, they don’t want to loosen up too soon and revive price pressures. Significant progress has been made in bringing inflation down from its multidecade highs by late 2022, but bringing inflation back up to their targets, typically 2 percent, is expected to be a bumpy process.
In the eurozone, “inflation is expected to fluctuate around current levels in the coming months and then decline to our target next year,” Ms. Lagarde, as wage growth slows and the impact of the pandemic and energy crisis continues to fade.
Last month, inflation in the eurozone slowed to 2.4 percent, closing in on the central bank’s target. Policymakers, wanting to ensure that price growth remains low, are focusing on core inflation. That figure better reflects domestic price pressures because it excludes volatile energy and food prices, which are heavily influenced by global prices. In March, core inflation slowed to 2.9 percent, more than economists expected.
Ms. warned Lagarde on Thursday said inflation in the service sector was still high, evidence that some price pressures were still lingering in the bloc. The central bank also watches wages, which are considered a sticky source of inflation services. Officials expect to get more data on annual wage negotiations by the June policy meeting.
For now, wage pressures are easing as expected. The central bank said on Thursday that wage gains were “gradually moderating” as companies absorbed some of the cost of higher wages into their profits, rather than passing them on. to customers.
Investors have bet heavily that the ECB will cut rates three times this year, starting in June.
In comparison, inflation in the United States has been warmer than expected for three months in a row, adding to expectations that the Federal Reserve may start cutting rates this summer.
“That the ECB has gone ahead is unusual,” analysts at Berenberg bank said in a note. “But the difference in current economic performance more than justifies that.”
On Wednesday, data showed that the US Consumer Price Index rose to 3.5 percent in March, from 3.2 percent the previous month. Investors quickly scaled back their bets on rate cuts, pushing up yields on government bonds, which hit borrowing costs.
Analysts at the Royal Bank of Canada said they now expect the Fed to begin rate cuts in December. But it’s too early to tell, they said, whether that diversity will continue. The idea that European central banks will deliver a deep rate-cutting cycle while the Fed keeps rates high for an extended period “seems highly questionable to us,” the analysts wrote in a note.
“We rely on the data, we don’t rely on the Fed,” said Ms. Lagarde. But he acknowledged that the impact of what is happening in the United States, such as moving financial markets and currency exchange rates, has an impact in Europe, an impact that is embedded in the central bank’s economic forecasts, he said.
European policymakers have refrained from suggesting a longer-term trajectory for interest rates, giving no signs of how many times and how quickly they might continue to cut rates once they start.
“We’re not pre-committing to a particular rate path,” Ms. Lagarde. “But the direction is pretty clear.”
