MNI ECB WATCH: On Course For June Cut, Still Data-Dependent

The European Central Bank pointed to a possible rate cut in June in its post-meeting statement on Thursday, but said it would keep a data-dependent approach and not commit to a pre-determined easing path.

More data available by June and a new fresh round of projections will allow the ECB to assess more confidently whether inflation is returning to its 2% target in a sustained manner, President Christine Lagarde told a news conference after the ECB kept its key interest rate on hold at 4% for a fifth consecutive time.

“If the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction,” the ECB said in its statement. (See MNI SOURCES: ECB Still Divided Over Guidance As It Nears Cuts)

While the ECB will keep its meeting-by meeting approach to setting policy, Lagarde stressed that “the direction is clear” for rates. However, inflation won’t decline in a straight line, and is likely to fluctuate around current levels before converging sustainably around target in 2025, she said.

“Between now and mid 2025 there will be ups and downs a lot because of base effects” she added, noting that upside risks persist from geopolitical uncertainty and wages growth.

Lagarde also noted downside risks from a slower global economy and tighter conditions from previous monetary policy measures, pointing to the results of the latest bank lending survey. (See MNI BRIEF: Bank Credit Standards "Broadly Unchanged" In Q1-ECB)

The ECB will continue to monitor sticky inflation in services and domestic prices, but Lagarde said that policy could be adjusted even if some sectors continue to be frothy.

“We are not going to wait until everything goes back to 2%. It is inevitable that some items will be slightly higher,” she said.

“A FEW” MEMBERS WANTED TO CUT IN APRIL

A "few" members of the ECB's Governing Council were already confident conditions had been met for an easing of monetary policy at Thursday's meeting, but were prepared to join the "overwhelming" consensus to wait for more economic data in June, Lagarde said.

The president was asked multiple times about stronger-than-expected U.S. inflation data, which have prompted a repricing of expected Federal Reserve rate cuts, but Lagarde stressed that ECB decisions will be made on the basis of conditions in the euro area, though she conceded that these will be influenced by the “wider global economy” including China and Japan as well as the U.S..

Overall economic conditions will feed into the the next ECB projections, she noted, adding that the nature of inflation has always differed between the two sides of the Atlantic, and that it should not be assumed “that what is happening in the EA will be the mirror of the U.S.”