Buoyed by falling inflation, the European Central Bank is expected to leave borrowing costs unchanged for the last time on Thursday, paving the way for its first interest rate cut in June.
The Frankfurt-based agency has kept its key interest rates unchanged since October 2023 following an unprecedented series of interest rate hikes aimed at curbing rampant inflation.
ECB President Christine Lagarde said after a meeting last month that Governing Council members did not yet have “sufficient confidence” on inflation to consider loosening the reins.
Since then, calls for interest rate cuts have intensified, with euro zone inflation slowing more than expected to 2.4% in March, bringing the ECB's 2% target closer to being met.
However, ECB officials have repeatedly said they are waiting for data that will not be available until the June 6 meeting, so a change of direction as early as this week seems highly unlikely.
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“We will know a little more by April and a lot more by June,” Lagarde reiterated in late March, referring specifically to data on wage growth in the euro zone.
The ECB is expected to release its own updated forecasts on inflation and economic growth in June.
Therefore, ING Bank economist Carsten Brzeski said Thursday's ECB Governing Council meeting “looks like a prelude to a further turning point in euro area monetary policy, the final stop before a rate cut.”
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The ECB's benchmark deposit rate currently stands at a record high of 4%, following an aggressive interest rate hike campaign to curb consumer price increases caused by Russia's war in Ukraine and pandemic-related supply disruptions.
Inflation in the euro area peaked at more than 10% in late 2022, but has fallen steadily in recent months and the ECB now expects to return to target in 2025.
But demand has waned as rising borrowing costs hit the euro zone economy, with households and businesses feeling the squeeze from expensive loans and mortgages.
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The 20-nation currency club narrowly avoided recession in the second half of 2023, weighed down by poor performance in Germany, its largest economy.
Like other central banks, the ECB is currently considering the best time to shift gears and support economic growth through lower interest rates without risking higher inflation.
Last month, the Swiss National Bank became the first major central bank to cut its key policy rate by 0.25 percentage points, starting a rate-cutting cycle.
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The U.S. Federal Reserve, which started raising interest rates earlier than the ECB and has kept them on hold in recent meetings, is expected to continue tightening for some time in the face of a strong economy.
Federal Reserve Chairman Jerome Powell said last week that high benchmark interest rates are “doing their job” against rising inflation and warned that cutting them too soon could be “pretty devastating” to the U.S. economy.
Some observers are concerned that the ECB may cut interest rates before the Fed.
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Lower interest rates in the euro zone could prompt investors to look elsewhere for higher returns, weakening the euro and making imports more expensive and reigniting inflation.
However, Capital Economics' Jack Allen Reynolds said the ECB “will not wait for the Fed's demands.”
“Both central banks will react to different data. Economic growth is much weaker in the euro area, so there is no doubt that the data currently supports an early rate cut by the ECB,” he said.
Once the ECB begins easing monetary policy, attention will quickly turn to the pace and magnitude of future rate cuts.
Many observers believe there have been at least three to four cuts this year, each of 25 basis points.
However, Lagarde said the ECB would not “commit in advance to a specific interest rate path” and stressed that future decisions would depend on future data.
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