MNI ECB WATCH: ECB Holds Rates, Says Too Early To Discuss Cuts

The European Central Bank kept its key interest rate on hold at 4% on Thursday for a third consecutive meeting, with President Christine Lagarde saying it was too early to discuss the timing of cuts but repeating that she saw no reason to disagree with a growing consensus for easing to begin by the summer.

Data “has broadly confirmed” past inflation projections, Lagarde told a press conference, though tight financing conditions are dampening demand and the eurozone economy “is likely to have stagnated” in the fourth quarter. There was consensus on the Governing Council that it was too early to discuss cuts at the January meeting, she said, and for continuing the ECB’s “data dependent” approach.

The ECB repeated phrasing from earlier statements that interest rates are at levels that if maintained for a sufficiently long duration, will make a substantial contribution to achieving the 2% inflation goal and that they will be set at sufficiently restrictive levels for as long as necessary. (See MNI SOURCES: "Biggest Minority" Favours ECB June Cut)

NO PUSH BACK AGAINST APRIL

While Lagarde’s comments at the press conference reinforced expectations of the likelihood of a June cut, she did not close the door to a first easing move in April.

“We need to be further along in the disinflationary process towards target to be confident we can discuss policy trajectory,” she told reporters.

Despite a 0.5-percentage-points pick-up in headline inflation in December due to higher energy prices and the removal of German subsidies it is expected to resume its descent in 2024, with underlying inflation continuing to decline, Lagarde said.

Risks for inflation are balanced, she said, with upside risks coming from geopolitical tensions, especially in the Middle East, and from wages and profit margins. Inflation could also surprise to the downside if monetary policy dampens demand by more than expected and world economy worsens unexpectedly, Lagarde said in the policy statement.

MORE INFORMATION NEEDED ON WAGES

The ECB is looking very carefully at the labour market, and especially at the link between profit margins and wage increases. The central bank so far sees no second-round effects from the pickup in wages.

With around 40% of the workforce’s wages yet to be determined” by Q1 2024, the ECB wants to wait for the end of April to better understand how wages are evolving, Lagarde said.

Asked about the level of the neutral rate of interest, Lagarde said "we're not going to know until we get to that point of the neutral interest rate". The president also said that the ECB’s Operational Framework Review is advancing at a fast pace with technical work set to be largely ready by spring.