The European Central Bank (ECB) has held its key interest rates steady for the third consecutive policy session, maintaining its hawkish stance and giving no indication of potential rate cuts in the imminent future.
The decision was made by the ECB's Governing Council, chaired by President Christine Lagarde, during the year's initial rate-setting session on Thursday. The primary refinancing rate, commonly referred to as the refi, remained at 4.50%. Meanwhile, the deposit facility rate was retained at an all-time high of 4.00%, and the lending rate stayed at 4.75%. Market analysts predict the ECB will adopt monetary easing measures by mid-year as inflation appears to be decelerating.
However, ECB policymakers are likely to disregard the recent substantial moderation in headline inflation, believing inflation threats are still present. This viewpoint stems from sustained core inflationary pressure and escalating risks such as wage negotiation outcomes and geopolitical issues like the Red Sea conflict. The ECB's forward guidance on interest rates remains unaltered.
In affirming its policy, the ECB stressed that the current interest rates, if sustained for a sufficient length of time, will significantly aid the achievement of their goal of bringing inflation back to the targeted 2%. It assured that future Council decisions would ensure the continuation of a restrictive policy as necessary.
The ECB, previously in a high-tightening phase, had increased rates by a total of 400 basis points through regular hikes since July 2022, a trend that concluded in September.
Economist Carsten Brzeski at ING theorizes that the ECB is unlikely to contemplate rate cuts as long as actual inflation sits closer to 3% rather than 2%. According to him, only a significant recession or a steep fall in long-term inflation forecasts to well below 2% would lead to rate cut discussions and subsequent policy easing by the ECB in the forthcoming months.
Similarly, Capital Economics expects the first rate cut to happen no earlier than this summer and predicts a rate cut in the second quarter. Jack Allen-Reynolds, an economist at the firm, mentioned that ECB policymakers want to see further signs of weaker wage growth before lowering interest rates. However, if core inflation continues to decline more rapidly than the ECB’s projections, and the economic outlook deteriorates more than anticipated, rate cuts could occur as early as April or June.
