ECB keeps interest rates unchanged, says that talks about cuts are premature

The European Central Bank left interest rates unchanged at record high of 4%, in line with expectations and signaled that uninterrupted streak of 10 consecutive rate hikes (4.5% increase in total) might be coming to its end.

Positive signals of steady easing in price pressures, as inflation has more than halved from the record high last year and more significant warning that the bloc’s economy has slowed above expectations, as high borrowing cost bites, contributed to today’s decision.

Many think that after today’s policy meeting the central bank is likely done with rate hikes and next move will be a rate cut, but there is still a long way towards this target.

The ECB said that current level of interest rates is sufficient to continue pushing inflation towards 2% target, though may keep restrictive policy for extended period, until the main goal is achieved.

European policymakers also stressed that their future approach to the monetary policy will highly depend on incoming economic data, as overall situation in the global economy remains highly volatile and primarily impacted by deteriorating geopolitics, which causes a number of negative impacts and obstructs attempts to stabilize conditions.

ECB President Lagarde, in her speech after the meeting, repeated some of her standard mantra, but poured cold water on expectations that the central bank may start cutting interest rates as early as June 2024, by comments that staying on hold this time does not mean they won’t hike rates again and not going to say that rates hit their peak, describing debate about rate cuts as premature.

She also pointed to main threats to short-term economic outlook – weakening economic activity and growing risk that bloc’s economy is heading towards recession, while inflation, despite being in a downward trajectory, still faces increased risk from rising energy prices on growing threats of escalation of the conflict in the Middle East, as the war in Ukraine has already drained European economy.

Overall, the outlook remains darkened by a number of factors, while the action of the ECB policymakers in past one year or so did help in curbing raging inflation, but at a very high cost.

Many criticize EU policymakers for not tackling the problem the correct way, in other words, the ECB was late to act when price pressures got unleashed and did not work on eliminating the core reasons of soaring inflation, but tried to extinguish one fire, while those measures fueled the other.

It seems that the way towards stabilizing inflation and bringing the economy into regular conditions will be much longer than initially thought, as a cocktail of negative factors, including inflation, slowing growth, worsening geopolitical situation, is likely going to be the main obstacles on recovery path for longer period.