By Chris Dorrell
The European Central Bank (ECB) is set keep interest rates on hold when it meets on Thursday, but markets will be keeping a close eye on what policymakers reveal about the timing of rate cuts.
After an aggressive burst of monetary tightening, interest rates across the bloc stand in a range of four per cent to 4.75 per cent – their highest level in 22 years.
This has helped contain the surge in inflation which took off after Russia’s invasion of Ukraine. Inflation across the bloc ended 2023 at 2.9 per cent, down from a peak of 10.6 per cent in October 2022.
However, progress on inflation has come at the cost of stalling growth. The euro area barely expanded in 2023 with most economists thinking it fell into recession in the second half of last year.
Now market attention is turning to when the ECB will start lowering rates. At the start of the year traders were betting that rates would be cut in March, paving the way for a rapid unwinding of the ECB’s rate rises over the course of 2024.
However, ECB members have been reluctant to signal when they may start lowering interest rates, fearing that it may spark a second wave. In particular, policymakers are concerned that high levels of wage growth could lead to persistent inflationary pressures.
Last week, a number of ECB rate-setters pushed back against market pricing. Speaking to Bloomeberg TV, Christine Lagarde, president of the ECB, said that market optimism “is not helping our fight against inflation”.
Although she admitted that a summer start to rate cuts was “likely” she said there was still “a level of uncertainty,” warning that a number of indicators were “not anchored at the level were we would like to see them”.
Similarly, Joachim Nagel, president of the Bundesbank, said last Monday that “it’s too early to talk about cuts” while French central bank chief Francois Villeroy de Galhau said the question of timing was “premature”.
“We’re not guided by a calendar but by data,” de Galhau added.
Looking to the meeting, policymakers will have to tread a narrow path. Analysts at BNP Paribas said the ECB will want to “acknowledge” the progress on inflation, but “at the same time not ‘declare victory’ given lingering uncertainty about the inflation outlook”.
Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics, thought the core message would be “a copy-and-paste job from December,” warning markets that inflation remains too high.
