The European Central Bank kept interest rates on hold for the fourth consecutive meeting on Thursday as policymakers noted progress in combating high inflation.
Interest rates on deposits remained at 4%, the highest in the central bank's 25-year history. Officials are considering how quickly they can lower interest rates, but said they need to see further evidence of slowing inflation. At present, strong wage growth is increasing domestic price pressure, the central bank said.
European Central Bank President Christine Lagarde told a news conference in Frankfurt that “we are more confident” because the slowdown in headline inflation has improved so far. “But we don't have enough confidence and clearly need more evidence.”
Last month, the eurozone's annual inflation rate slowed to 2.6%, moving closer to the central bank's 2% target. But policymakers at the central bank, which sets interest rates in the 20 countries that use the euro, are wary of cutting rates too soon and reigniting inflationary pressures. Economists have warned that the central bank's path to achieving its inflation target is likely to be difficult.
Those concerns were reflected in the latest inflation report, with headline interest rates in February beating economists' expectations and core inflation, a key measure of domestic price pressures that subtracts energy and food prices, also beating expectations.
Traders had been expecting a rate cut in June, but their expectations began to temper after the release of inflation data. Expectations for rate cuts were revived after the central bank lowered its inflation outlook on Thursday. Currently, the inflation rate is expected to average 2%, reach the target next year, and fall to 1.9% in 2026.
Lagarde reinforced the view that policymakers will wait until at least June to change their interest rate stance, saying: “We'll know a little more in April, but we'll know a lot more in June.” Stated.
Other major central banks face similar challenges over the timing of rate cuts. Western countries are making progress in controlling inflation. Still, there are concerns that inflationary pressures may not be completely relieved, especially as falling inflation increases consumer purchasing power. Interest rates on government debt have also fallen, easing financial conditions for businesses and homeowners. These factors may cause central bankers to respond by keeping policy rates high for longer periods of time.
In the United States, Federal Reserve Chairman Jerome H. Powell told lawmakers this week that the Fed plans to cut interest rates this year, but that he has “greater confidence” that inflation has been overcome before taking any action. He said he wanted to. Hugh Pill, the Bank of England's chief economist, said last week that Britain's central bank needed to be “vigilant against being lulled into a false sense of security about the direction of inflation”.
In the euro area, the pace of wage growth is at the center of discussions about interest rate cuts. ECB policymakers said: Many people wait for companies and employers to make annual salary adjustments, which in Europe often occur near the beginning of the year. Officials are looking for signs that wage growth is slowing or that businesses are absorbing the costs of wage increases rather than passing them on to customers in the form of higher prices.
“I'm not saying that wages should go down or that wage growth should slow down,” Lagarde said. But, she added, “we have to pay particular attention to wages.” Wages are a key driver of service inflation, and a particularly troublesome form of price rise.
There are some early signs that wage growth is slowing and companies are using profits to protect their customers. However, collecting this data takes a long time.
There is growing pressure to cut interest rates to support Europe's economy, which is suffering from rising interest rates. The euro zone's growth rate in 2023 is expected to remain at 0.5%, and the central bank now expects growth to remain at 0.6% this year, having revised its forecast downward three months ago.
Lagarde said the economy “remains weak” as consumers cut back on spending, investment slowed and companies exported less. The economy is expected to recover only gradually throughout the year.
Even if the central bank decides to cut interest rates, there will likely be further disagreement over how quickly and by how much rate cuts should continue. While the economy may no longer need restrictive monetary policy, it is unlikely that policymakers will want to return to the accommodative stance of the past decade aimed at avoiding deflation.
“Future decisions will ensure that policy rates remain sufficiently restrictive for as long as necessary,” Lagarde said.
