The European Central Bank (ECB) kept interest levels static last Thursday, as anticipated, but acknowledged a quicker deceleration of inflation than previously assumed. This paves the way for potential interest rate deductions later this year. The ECB has maintained soaring borrowing costs since September, deflecting any suggestions for rate reductions, despite policymakers openly recognising the inevitability of such a change, leaving only the timing for discussion.
The ECB issued a statement noting that inflation predictions have been lowered, especially for the year 2024, due primarily to diminished input from energy costs. Accompanying a generally favourable outlook, the bank also cut its second successive quarterly inflation forecast, setting price growth at 2.3% for the current year and aligning with its 2% target for the following year.
Inflation has been observing a steady decline over the past few months due to falling energy prices and a second consecutive year of stagnation in the euro zone economy, encompassing 20 countries. However, the large service sector of the bloc experiences persistently high-price pressures, especially from wages, threatening a potential inversion of price trends. Consequently, the ECB maintains that rate reductions will only be initiated when wage restraint is evidently demonstrated and the inflation deceleration is confirmed as long-term.
Notwithstanding the eased inflationary pressure, domestic price pressures have remained high due to notable wage growth, as stated by the bank. Investors predict three or four rate reductions within this year, with an initial movement in June, which will decrease the 4% deposit rate to either 3.25% or 3% by December.
While only a handful of policymakers have proposed specific dates for the first rate cut, several have hinted at June, with others suggesting the move should only be made after the release of key wage data in May. ECB president Christine Lagarde will address the public on these matters at a press conference on Thursday afternoon. She will be queried on the timeline of ECB policy alterations and the conditions prompting such actions – Reuters.