Eurozone interest rates are expected to remain high for at least another month, and Europe's economy remains “weak,” the head of the central bank said.
The European Central Bank (ECB) has decided to keep interest rates at record high levels, despite easing inflation in the economic and political spheres.
Earlier today, the ECB Governing Council announced it would keep deposit rates unchanged at 4%, in a blow to homeowners and debtors across the continent.
Nevertheless, the central bank has indicated that a cut in the benchmark interest rate could be introduced as early as June.
ECB President Christine Lagarde has warned that the eurozone economy will remain “weak” in the first quarter of 2024.
He cited the fact that manufacturers are facing weaker demand, while production for energy-intensive companies continues to be constrained.
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The central bank chief said the euro zone economy was “weak” in the first quarter of this year.
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But Lagarde argued that rising real incomes, meaning wages rising faster than prices, would help the economy recover.
The central bank governor also pointed out that the unemployment rate in the euro area is at its lowest level since the creation of the euro.
But Lagarde noted that companies are cutting back on vacancies, which could have an impact.
The ECB suggested that a rate cut would be “appropriate” given underlying price pressures, updated forecasts and increased confidence that inflation is easing due to the previous rate hike.
In the 12 months to March 2024, consumer price index (CPI) inflation in the euro area fell to 2.4%.
This is far from the 2022 peak of 10.6% and close to the central bank's 2% target.
The ECB, Bank of England and Federal Reserve have been raising interest rates in an attempt to generate inflation on their own in the wake of the coronavirus pandemic.
Despite easing inflation on both sides of the Atlantic, central banks have not cut interest rates in recent days.
However, today's European Central Bank announcement shows that financial institutions are preparing to change course.
The ECB said in a statement: “The Board's latest assessment of the inflation outlook, underlying inflation dynamics, and the strength of monetary policy spillovers provide further confidence that inflation is sustainably converging on target. It would be appropriate to reduce the level of monetary policy constraints.”
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The Bank of England also resolved to raise and maintain interest rates at a higher level.
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Ahead of today's announcement, ING economist Carsten Brzeski explained why the rate cut was planned.
“We believe today's meeting should be the last stop before a rate cut, even though the policy announcement does not specify a June date for the first rate cut,” he said.
“In fact, the ECB has been shifting its communication very gradually since December, from being hawkish to being dovish.
“A stronger-than-expected decline in headline inflation and anemic economic growth have opened the door to some rate cuts. This does not fully reverse the rate hikes since July 2022 and remains a restrictive stance. It will be eased gradually.”
