During the meeting on Thursday, April 11, the European Central Bank decided to keep interest rates at the same level.
The mentioned decision of the financial regulator can be described as a clear signal that the slowdown in the inflationary process will provide it with the opportunity to begin implementing a policy of gradual lowering of borrowing costs shortly.
The deposit rate as a result of the ECB meeting was maintained at a record high of 4%. It is worth noting that the majority of experts interviewed by the media predicted the appropriate decision. The ECB’s Governing Council, in its accompanying statement, noted for the first time the likelihood of interest rate cuts. The financial regulator will begin to ease its monetary policy after confidence is formed that the dynamic of the growth in consumer prices is steadily approaching the target of 2%.
The ECB’s official statement, released on Thursday notes that lowering the current cost of borrowing will be appropriate if the Governing Council updates its assessment of the prospects for growth in the cost of goods and services, the dynamic of underlying inflation, and the effectiveness of implemented monetary policy that is on a trajectory towards the mentioned target.
ECB President Christine Lagarde reiterated the prospects for a change in interest rates in two months. In this context, she noted that the final decision on the relevant issue will depend on the data on the condition of the European economy and its dynamic. Christine Lagarde also said that the financial regulator would not pre-committing to a particular rate path. She noted that in April, certain information will be received that is necessary to understand the prospects for the near future. According to Christine Lagarde, several members of the ECB Governing Council are already quite confident in the inflation vector. At the same time, she said that even more data will be received in June, including the quarterly economic forecast.
Money markets held bets on monetary policy easing in the current year at approximately the same level. The most common expectation is that the corresponding indicator will be cut by three-quarters. On April 11, the euro fell to its lowest level since February, at $1.0715.
In 20 eurozone countries, inflation is on a downward trajectory. Against this positive background, the ECB is preparing to start lowering the cost of borrowing in June. It is worth noting that the financial regulator has not cut interest rates since 2019.
Elsewhere in the world, central banks have less confidence in the future dynamic of inflation. In this case, an important circumstance is that an increase in consumer prices was recorded in the United States in March, which increased fears that high-interest rates would turn out to be a longer-term reality. It is highly likely that due to the pessimistic data from last month, the Federal Reserve System will be forced to postpone the start of lowering the cost of borrowing.
The ECB is currently focusing on a more optimistic vision of the future. Last month, inflation in the eurozone fell to 2.4%. This result exceeded forecasts that provided for a more moderate slowdown in the growth of the cost of goods and services. Services costs in the eurozone continue to show growth of 4%. Shortly, data on the dynamic of the salary indicator will be released, which, according to some experts, is likely to show a moderate increase.
In the context of discussing the impact of the Fed’s actions on ECB decisions, Christine Lagarde said that the European financial regulator doesn’t take its cue from across the Atlantic. She also noted that there are many channels of influence, except for the exchange-rate dynamics. During a conversation with journalists in Frankfurt am Main, Christine Lagarde emphasized that the ECB does not depend on the Fed. She also noted that the United States is a very large market, a very sizable economic system, and a major financial center.
The lowering of the cost of borrowing will be a relief for the European economy, which has shown almost no growth for more than a year. This week, the ECB released data according to which an unexpected decline in demand for corporate loans was recorded in early 2024. Against the background of the mentioned information, expectations of an early recovery in production have weakened.
Currently, most European companies expect wage growth to slow down during 2024. This is evidenced by the results of special surveys. Goldman Sachs economists predict a significant slowdown in wage growth in the eurozone in the second half of 2024.
Christine Lagarde says that the economic recovery will begin as inflation weakens. As part of the implementation of this scenario, real income, exports, and wages will begin to grow. According to Christine Lagarde, monetary policy should have less impact on demand over time.
The ECB President also announced the expectation that in the coming months, the inflation rate will be within the current level. After that, according to her forecast, the mentioned indicator will reach the target of the European financial regulator.
Currently, the topic of interest rate changes in the eurozone after June is at the center of an active discussion. Those members of the ECB Governing Council who adhere to the so-called dovish position insist on lowering the cost of borrowing as soon as possible. Other officials of the financial institution say that a more cautious approach to solving this issue is preferable and note the benefits of a high level of synchronization of the regulator’s actions with economic data.
As we have reported earlier, ECB Vice President Warns About Difficulties in European Economy.
