MNI ECB WATCH: Rates On Hold, Pointer To Possible June Cut

The European Central Bank kept its key interest rate on hold at 4% on Thursday for a fourth consecutive time, and President Christine Lagarde said that while Governing Council did not discuss rate cuts this time, policy makers are “just beginning to discuss the dialing back of our restrictive stance”.

Lagarde seemed to point to June as possible timing for a first cut, saying that the ECB “will have a lot more data” on wages agreement than in the April meeting. The current data is “directionally good” but more is needed to ensure its durability, Lagarde said, adding that ECB does not necessarily need to wait until inflation hits 2% “to take a decision”. (See MNI SOURCES: ECB Cut Expectations Range From 50-100BP In 2024)

Although “most measures of underlying inflation have eased further, domestic price pressures remain high, in part owing to strong growth in wages,” she told a news conference.

Asked by MNI about what the ECB should do if headline inflation remains sticky around 2.5% while the projections see it converging on 2%, Lagarde noted that more was progress was currently required although "recently the errors in our projections have reduced significantly, and this certainly makes us feel more confident."

The outcome of the ECB’s operation framework review could be published following a Governing Council non-monetary policy meeting on March 13, Lagarde said, adding that the agreement was very close and that “highly technical” details could be unveiled by that date.

Geopolitical factors like the tensions in the Middle-East could persist as an upside risk for inflation but there are also downside risks if monetary policy dampens activity more than anticipated, Lagarde said.

Growth risks are tilted to the downside but could be stronger than expected if inflation falls faster than forecast.

INFLATION COOLS IN 2024 AND 2025

March’s staff macroeconomic projections saw the outlook for inflation revised downward for 2024 and 2025, with headline rate converging to 2% in both 2025 and 2026 (2% and 1.9%, respectively). Core inflation was also revised down in the three years of the horizon with rates seen at 2.6% in 2024 and 2.1% and 2% for 2025 and 2026.

The growth outlook for 2024 was revised down to 0.6%, but Lagarde said that economic activity will pick up in the next few months. Growth estimates for 2025 and 2026 remained practically unchanged, at 1.5% and 1.6%, respectively.