FRANKFURT, Germany (AP) — The European Central Bank signaled Thursday it may cut interest rates at its next meeting in June, the latest move by developed-nation central banks to cut interest rates. Federal Reserve BoardThey are struggling with the extent to which lower inflation will reduce credit costs for businesses and consumers.
The bank kept its key interest rate at a record 4 percent but President Christine Lagarde said a rate cut was on the table.
If upcoming data confirms a decline in inflation, “it would be appropriate to lower the current monetary policy constraint,” the governor said at a press conference after the policy decision.
The policy meeting, held at the bank's skyscraper headquarters in Frankfurt, was widely seen as a precursor to the June 6 meeting, with Lagarde broadly hinting that the bank would have more information on inflation trends at that meeting.
Thursday's stance “officially paves the way for a rate cut in June,” said Carsten Brzeski, head of global macro at ING Bank. “It's the first time the ECB has mentioned a rate cut in an official policy statement.”
The decision comes as developed world central banks are leaning toward reversing some of the sharp hikes in interest rates implemented to tame inflation. The Swiss National Bank was the first major central bank to cut interest rates in the current cycle on March 21. The notable exception is Japan, which raised interest rates for the first time in 17 years on March 19.
It's a policy shift that stock investors are watching closely. Expectations that interest rates would fall by the summer have sent markets soaring in recent months. Broad U.S. stock indexes quickly fell on Wednesday, and bond prices rose, as a better-than-expected 3.5% inflation rate in March raised concerns that the Fed might wait longer than previously thought to cut its benchmark interest rate.
Lagarde said the ECB's interest rate policy is based on European inflation data, and that U.S. inflation is only considered as part of a global picture that includes China, Japan and emerging markets. “We have to make monetary policy decisions based on the data that the euro area publishes and on the global situation,” she said.
She said the drivers of inflation in the U.S. were different and “the two economies are not the same.”
Inflation in the 20 European Union member states that use the euro currency and whose interest rate policy is set by the ECB fell to 2.4% in March from a peak of 10.6% in October 2023.
Economists say that while U.S. inflation was driven by massive government spending, the price hike in Europe was the result of an external shock, when Russia all but cut off supplies of cheap natural gas after invading Ukraine. Energy prices have now fallen to pre-war levels, and inflation is gradually easing as a result.
Rising interest rates can tame inflation and dampen demand for goods by making it more expensive to borrow to buy things, but if they go too far or are sustained for too long they could slow growth. And Europe's growth is Anemic to say the leastThe eurozone economy didn't grow at all in the last three months of last year, and the outlook for the just-ended quarter's figures isn't much better.
Central bank benchmarks guide banks' borrowing costs and through that influence interest rates across the economy, from business lines of credit to mortgages, credit cards and government bonds.
A rate cut signals that the central bank is anticipating a booming economy that will boost corporate profits, and it could boost stock prices as lower rates make stocks more attractive relative to interest-earning assets such as bonds and CDs.
