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FRANKFURT – The European Central Bank left its key deposit rate at a record high of 4 percent on Thursday, content to wait for more evidence that inflation has been beaten for good.
“Although most measures of underlying inflation have eased further, domestic price pressures remain high, in part owing to strong growth in wages,” the ECB said in a statement.
“The Governing Council’s future decisions will ensure that its policy rates will be set at sufficiently restrictive levels for as long as necessary,” the ECB said, giving no sign of being willing to cut interest rates any earlier than officials have previously indicated.
The central bank cut its forecast for eurozone growth this year, and also cut its forecasts for inflation. Opening her press conference, President Christine Lagarde remarked that the risks to the economy “remain tilted to the downside.”
Financial markets took the new forecasts as an indication that it will start cutting rates in the next few months: eurozone bond yields fell along with the single currency following the announcement while the benchmark Stoxx 600 equity index hit a fresh record high.
ECB staff now expect inflation to hit, or even slightly undershoot, the 2 percent target in both 2025 and 2026, which is generally seen as the relevant horizon for policy. For this year, the inflation forecast was cut to 2.3 percent, from 2.7 percent in December. That will help ease concerns that expectations of lingering inflation could encourage consumers and firms to push wages and prices ever higher.
Lagarde has previously indicated that the ECB will not cut until policymakers have enough evidence from wage negotiations around the bloc to be confident that they won’t drive a wage-price spiral. A full picture of wage dynamics will only be available at the June policy meeting, officials have indicated. In her opening comments, Lagarde nodded again to “robust wage growth” and signs of falling productivity.
Investors have not entirely bought into that guidance, with a sizeable minority betting that weaker economic prospects will trigger a move at the April policy meeting.
The ECB cut its growth forecast for this year to 0.6 percent this year, from 0.8 percent in December, a move that reflects similar actions by the governments of France and Germany, the region’s two biggest economies. It expects a far-from-stellar comeback of 1.5 percent in 2025 and 1.6 percent in 2026.
ECB staff also trimmed inflation forecasts excluding energy and food to show an average of 2.6 percent in 2024, 2.1 percent in 2025 and 2.0 percent for 2026.
“Since the ECB has been setting interest rates for the eurozone, it has lowered them 21 times, and never when core inflation was above 2.2 percent,” said S&P Global Ratings economist Sylvain Broyer. “Today, core inflation stands at 3.1 percent and will not fall below 2.2 percent before the summer. Barring an accident affecting growth or financial stability, a cut in ECB rates in June is therefore the most likely scenario.”
Friedrich Heinemann, an economist with the ZEW think-tank in Mannheim, agreed that the “surprisingly” strong drop in inflation and “poor economic data” boost the chances for a rate cut in June.
Survey data this week have added to evidence that the eurozone economy is struggling to build any momentum, after bottoming out toward the end of last year. The composite purchasing managers index compiled by S&P Global, a rough proxy for economic activity, hit an eight-month high in February but remained below the level that typically indicates growth.
