ECB leaves eurozone interest rates on hold but hints at cut this summer – as it happened | Business
ECB signals interest rate cut coming
The European Central Bank has also signalled that a cut to interest rates is coming soon, if inflationary pressures continues to fall.
Having left its key interest rates on hold today, the ECB suggests it could cut rates if its next forecasts show inflation pressures are easing.
Those forecasts will be ready for the ECB’s next meeting, in early June, and will show whether inflation is falling towards its 2% target, or not.
The ECB says:
If the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction.
Key events
Closing post
Time for a recap…
The European Central Bank (ECB) has signalled it could start cutting interest rates as soon as this summer, following a sharp fall in inflation across the eurozone.
The ECB left rates on hold today, but president Christine Lagarde revealed a few policymakers had been ready to cut today. The majority, though, chose to leave rates on hold while the bank gathered more evidence that inflationary pressures are easing.
Lagarde told reporters:
“Without being triumphant, or celebrating anything yet, what we are observing is a decline of inflation, a disinflationary process that is in progress.”
Progress on productivity, falling wage growth and an easing of company profits could help the ECB to start cutting rates.
We’ve just taken our latest monetary policy decisions, determining what’s needed to return inflation to our 2% goal in a timely manner.
Tune in to #TheECBPodcast to hear President Christine @Lagarde present the decisions in our press conference https://t.co/0zg0L91LZ6
— European Central Bank (@ecb) April 11, 2024
Financial markets have been reassessing the prospects of rate cuts this year, after US inflation rose faster than expected yesterday.
The City now expects just two cuts to UK interest rates this year, and a similar reduction in the US.
The Bank of England is now expected to move before the Federal Reserve. But, Bank of England policymaker Megan Greene warned that investors had underestimated the risk that inflation would remain high for longer in Britain than in other advanced economies.
She wrote in the Financial Times today:
Momentum in the markets has been towards pricing in later rate cuts by the Fed as economic growth remains robust. In my view, rate cuts in the UK should still be a way off as well.
The head of the International Monetary Fund is urging the world’s leading central banks must resist growing pressure for early interest rate cuts amid concerns over stubbornly high inflation on both sides of the Atlantic.
Kristalina Georgieva said high inflation across advanced economies was “not fully defeated” and could require a longer wait before reducing borrowing costs.
At today’s press conference, President Lagarde sought to strike a balanced tone, explains Max Stainton, senior global macro strategist at Fidelity International:
She highlighted that growth risks remained tilted to the downside, inflation risks were balanced, and labour market tightness was declining.
These factors, combined with profits and wages growing less strongly than anticipated and more timely indicators of wages also showing further moderation are clearly giving her and the Council greater confidence that they are on the brink of the cutting cycle.
Nevertheless, President Lagarde didn’t entirely remove the ECB’s data dependence, making it clear that the June data on profits and wages, as well as updated staff projections would be the critical final inputs into the Council’s decision making.
Central banks must resist pressure for early rate cuts, says IMF head
Richard Partington
Boom. The head of the International Monetary Fund is urging the world’s leading central banks to resist growing pressure for early interest rate cuts.
Kristalina Georgieva said high inflation across advanced economies was “not fully defeated” and could require a longer wait before reducing borrowing costs, amid concerns over stubbornly high inflation on both sides of the Atlantic.
The IMF managing director alluded to the pressure from politicians that central bank chiefs were likely to face in a pivotal election year, ahead of voters going to the polls in the US, UK and EU.
She said:
“On this final stretch, it is doubly important that central banks uphold their independence. As we know, policy credibility is vital in the fight to restore price stability.
“Where necessary, policymakers must resist calls for early interest rate cuts. Premature easing could see new inflation surprises that may even necessitate a further bout of monetary tightening.”
Speaking before the IMF’s spring meetings in Washington next week, she highlighted a fall in advanced economy headline inflation to 2.3%, from 9.5% 18 months earlier. This trend was expected to continue, Georgieva said, creating the conditions for major central banks to begin cutting rates in the second half of this year.
More here:
Lagarde: Not being triumphant, but inflation is declining
Christine Lagarde rounds off her press conference by outlining the progress the ECB sees in its fight against inflation.
She declares:
Without being triumphant, or celebrating anything yet, what we are observing is a decline of inflation, a disinflationary process that is in progress.
That progress is comforting the ECB that the monetary policy it has adopted has contributed significantly to this drop in inflation, she explains.
And she repeats that the ECB will continue to assess the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission when deciding when it can start to lower interest rates.
We will be attentive to the evolution of wages, pay close attention to profits for signs that firms are absorbing wage increases as much as possible, and also monitor productivity growth, she explains.
That’s the end of the press conference.
The ECB is a “bank of all seasons”, says Lagarde
Q: Will the ECB’s policy change by seasons, going from a ‘restrictive season’ to a time of ‘gradual normalisation’?
The ECB is a “bank of all seasons”, Christine Lagarde jokes, channelling Thomas More.
Bur rather than juggling matters of monarchy and ecclesiastical dilemmas, the ECB just has to decide when it is safe to cut interest rates.
And on that, Lagarde says the ECB can’t be tied to a particular season – “we will be data-dependent”.
So, if the data continue to move in a disinflationary path, that will be reflected in the path the ECB takes on interest rates, she pledges.
Q: Could the ECB press on with an interest rate cut in June, even if services inflation is 4%?
Christine Lagarde says services inflation is still holding at high levels, and has been around 4% for the last five months.
Service sector inflation will be examined closely, but it’s ‘inevitable’ that some elements will be at higher levels than others.
The ECB won’t wait until all the items that make up the inflation basket are down to 2%, she adds, while policymakers will also be “attentive” to how oil prices evolve.
Christine Lagarde then plays down suggestions that the ECB can draw lessons from the US.
The drivers of inflation in the US are different than in the eurozone, Lagarde points out, as was the fiscal response from governments.
Indeed, consumption by US consumers is different, as are the investment landscapes.
She says:
The two economies are not the same, the political regimes are not the same, the fiscal policies are different.
Thus, the ECB must focus on its jurisdiction, and not assume that what happens in the US will also occur in Europe, she adds.
Q: Is your confidence about falling eurozone inflation lower than a month ago, when you gave your speech to the ECB’s Watchers conference?
Lagarde says that “most if not all” of what she outlined in that speech remains intact, but she won’t say if she’s more or less confidence.
The speech (online here) explained the impotance of building sufficient confidence to dial back policy, and singled out wage growth, profit margins and productivity growth as important factors.
Q: Has the surprisingly hot inflation report from the US yesterday, and the reaction, changed the way you think about the ECB’s policy path?
Christine Lagarde says the ECB is “data dependent”, not “Fed dependent”.
But the latest US inflation, like everything that affects the eurozone, will be fed into the ECB’s next forecasts, she explains.
Q: Are you worried that strong US inflation could push the dollar up to parity against the euro (if it prevents the US Federal Reserve cutting interest rates quickly).
Lagarde says the ECB doesn’t target exchange rates, or comment on them.
But, there are “multiple channels” through which influence can be made, not just through the FX rate.
Lagarde Q&A: Extra data will help make decision in June
Onto questions….
Q: How quickly can the European Central Bank gain enough confidence about falling inflation to start cutting interest rates? Could it come as soon as June?
Christine Lagarde reads out the new sentence whch has been added to the ECB’s monetary policy statement (see earlier post).
In June, the ECB knows that it will get a lot more data, and also a new inflation projection, she explains.
The ECB will analyse that, and then determine if it confirms the hope that inflation will returns to target in a sustained manner, and reinforces its confidence, she explains.
That certainly sounds like the ECB could cut rates in June, if it sees signs that inflationary pressures are easing as it hopes.
Q: Was today’s decision unanimous?
Lagarde reveals that “a few members” of the governing council felt sufficiently confident from the data we have in April to make rate cuts today. But they agreed to rally around the consensus of waiting until there is more evidence, she explained.
Nothing really new from #lagarde today, developments continue as expected.
— Francesco Papadia (@FrancescoPapad1) April 11, 2024
Lagarde: Eonomy has been weak, but rising real incomes will help
On the economic outlook, Christine Lagarde warns that the eurozone economy remained “weak” in the first quarter of 2024.
Manufacturing firms are facing weak demand, she warns, while production remains subdued especially among firms who need large amounts of energy.
Rising real incomes (pay rising faster than prices) should help the recovery, she says, thanks to falling inflation and increased wages.
Lagarde points out that the eurozone’s unemployment rate is the lowest since the euro was created, but adds that firms have been cutting back on vacancies.
Lagarde then insists that the ECB is not pre-committing to a particular rate path.
She reads out the point the ECB made earlier, that “it would be appropriate to reduce the current level of monetary policy restriction” if the Governing Council grows more confident that inflation is converging to the target in a sustained manner.
Lagarde press conference begins
ECB president Christine Lagarde is briefing reporters in Frankfurt now about today’s interest rate decision.
She begins by confirming that the central bank left its three key interest rates on hold today, and runs through the statement issued this afternoon.
Inflation has continued to fall, she points out, driven by food and goods price inflation, while wage growth is gradually moderating.
Firms are absorbing part of the rise in labour costs in their profits, she adds (which suggests that a full-blown wage-price spiral isn’t breaking out).
However, Lagarde adds that recent interest rate increases are subduing demand, and pushing down inflation.
Despite that, she cautions that domestic price pressure are strong, and are keeping services price inflation high.
And she insists the ECB is “determined” to bring inflation down to the ECB’s 2% target in a timely manner.
We should hear from ECB president Christine Lagarde in a couple of minutes.
In the meantime, there’s encouraging news on inflation from America.
US producers raised their prices more slowly than expected last month, with the US PPI index only rising by 2.1% in March, below the 2.2% expected.
That suggests inflationary pressures in the US may be lower than thought; which should cheer markets, after the angst caused by the rise in consumer price inflation yesterday.
The latest weekly jobless claims total is also lower than feared:
US PPI inflation came in better than the consensus forecasts with…
0.2% month-on-month increase in producer prices, versus the consensus forecast of 0.3%, and
2.1% annually versus 2.2%.
While on US data, weekly jobless claims came in at 211,000, lower than the consensus…
— Mohamed A. El-Erian (@elerianm) April 11, 2024
The ECB is undoubtedly preparing the way for a cut and we will probably see them move well ahead of the Fed, says Neil Birrell, chief investment officer at Premier Miton Investors.
ING: ECB officially opens the door to a June rate cut
This is the first time (in the current cycle) that the ECB has talked about rate cuts in its official policy announcement (see earlier post) points out Dutch bank ING.
They told clients that the ECB has “officially opened the door to a June rate cut”.
ING’s Carsten Brzeski explains:
Even if the policy announcement does not explicitly mention June as the moment for a first rate cut, we think that today’s meeting should mark the final stop before the cut.
In fact, the ECB has gone through a very gradual transition of its communication since December, turning from hawkish to dovish. The faster-than-expected drop in headline inflation, as well as anaemic growth, have opened the door for some rate cuts. Not a full reversal of the rate hikes since July 2022, but rather a soft loosening of a still restrictive stance.
Wage data will help determine how quickly the Europeam Central Bank can cut interest rates.
Richard Carter, head of fixed interest research at Quilter Cheviot, explains that the ECB could be the first of the world’s largest central banks to start cutting rates in the current cycle.
The European Central Bank has predictably opted to hold rates once more. While for the first time it has signalled a clear intention to begin cutting rates if inflation continues to head in the right direction, which could potentially come as soon as June, it stopped short of pre-committing to this.
Inflation appears to be better behaved and less sticky in the Eurozone than it has been elsewhere, particularly when compared to the US where just yesterday we saw another unwanted uptick which took headline inflation to 3.5%. Given the Federal Reserve is now expected to resist making any cuts for some time yet, and the Bank of England faces a difficult balancing act, the ECB could well be the first to make a move.
Nonetheless, the ECB has maintained its data dependent approach and should something change between now and its next interest rate decision then we could see it row back on this more positive outlook. It will be keeping a close eye on key data between now and its 6 June meeting, particularly the crucial wage data which has been running well above the 3% target the ECB has stated would be conducive with its inflation target.
Markus Ferber, MEP, is urging the ECB not to wait too long before cutting interest rates.
Ferber points out that the eurozone would benefit from lower interest rates:
The key challenge in monetary policy is getting the timing right. In the beginning of the interest rate cycle, the ECB was far too hesitant to raise rates. Now, the ECB should not make the opposite mistake. Inflation data has been very favourable and monetary policy always takes effect with a considerable time lag. Christine Lagarde has promised to make data-driven decisions. If the inflation data comes in much better than expected, this should have consequences for monetary policy.
The current monetary policy stance has a restrictive effect on economic activity. This is justified in times when inflation is high and the economy is running hot, but the European economy is far away from such a situation. Right now, the European economy would benefit from a more permissive monetary policy.
