ECB signals June rate cut with 2pc inflation in sight

Frankfurt: The European Central Bank has signalled June is the earliest it is likely to cut interest rates after it lowered its forecasts for inflation, predicting it will reach its 2 per cent target next year.

The central bank maintained its benchmark deposit rate at an all-time high of 4 percent at its meeting on Thursday. But it lowered its inflation forecast for this year from 2.7 per cent to 2.3 per cent, and trimmed it for 2025, opening the door to possible rate cuts in the coming months.

“We are making good progress towards our inflation target and we are more confident as a result,” said ECB president Christine Lagarde. “But we are not sufficiently confident. We clearly need more evidence and more data. We will know a little more in April, but we will know a lot more in June.”

Lagarde rejected the idea that there was “no rush” to cut rates. Instead, she said the ECB governing council had “just begun discussing the dialling back of our restrictive stance” even though it did not discuss whether to immediately cut rates at this week’s meeting.

Carsten Brzeski, an economist at Dutch bank ING, said: “This time the message was mercifully clear from Lagarde that they are looking to cut in June. The bigger question is how fast will they cut from that point.”

The central bank also reduced its 2024 growth forecast for the fourth quarter in a row, saying it expected eurozone gross domestic product to rise just 0.6 per cent this year, down from its previous estimate of 0.8 per cent.

Even as the economy slows to a crawl, several rate-setters have expressed concern that rapid wage growth could keep pushing inflation above the ECB’s 2 per cent target — particularly in the labour-intensive services sector.

Underlining these worries, the ECB said it expected core inflation — which excludes volatile energy and food prices — to be 2.6 per cent this year, slightly lower than its previous forecast of 2.7 per cent.

Lagarde said the ECB was “laser-focused” on wage growth and profit margins to seek “confirmation of what we are beginning to see, which is moderation on the wage front and an absorption of those higher wage costs by the profit margins”.

“I wish everything was closer to our target — but we are not there yet,” she said, but added: “I am not saying that we will wait until we see everything at 2 per cent.”

Ann-Katrin Petersen at theBlackRock Investment Institute said inflation was likely to remain sticky enough to avoid a return to the negative rates the ECB had in place two years ago. “With a still tight labour market and subdued productivity, domestic price pressures could keep inflation near or above 2 per cent,” she said.

The ECB’s decision to leave rates on hold follows a similar move by the Canadian central bank on Wednesday and is expected to be mirrored by the US Federal Reserve and the Bank of England when they meet in two weeks’ time.

Stickier than expected inflation readings have prompted investors to shift their bets this year on when the major central banks will start cutting borrowing costs from the spring to the summer.

The eurozone economy stagnated for much of last year and has been slower to recover from the double shock of the pandemic and Russia’s invasion of Ukraine than most advanced economies, in particular the US.

Inflation in the eurozone has dropped rapidly from its peak above 10 per cent to 2.6 per cent in February. Yet services inflation has come down more slowly from its record annual rate of 5.6 per cent last July to 3.9 per cent in February. Lagarde said services-dominated domestic inflation was the one area that was not declining.

She also said the ECB would announce the results of its operational framework review on March 13, when it is expected to announce how it will continue providing liquidity to commercial banks and the optimal size of its bond portfolio in the future.