ECB keeps its monetary policy unchanged but surprises by signals for a rate cut in June
The European Central Bank kept its interest rates unchanged at a record high, in line with expectations, but surprised markets with signals of possible rate cuts in the near future.
The policymakers showed readiness to start easing the monetary policy, earlier than many expected, although the decision will be depending on future economic data, with brighter figures from the labor sector and inflation, probably to speed up the process.
The ECB said that the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction.
In addition, the ECB President Christine Lagarde, in her press conference following the rate decision, acknowledged the relevance of developments in the US economy to its policy-setting, after hotter than expected March inflation numbers, but also stressed that conditions in the euro zone were different and highlighted that the ECB will remain data-dependent and not Fed-dependent, despite that the Fed, as world’s biggest central bank, generally sets the tone for global financial markets.
However, many economists believe that the ECB will face difficulties if the US central bank delays start of its policy easing, which may slow but not stop the process.
The policymakers shift their focus towards incoming inflation data and economic growth projections, which will make the overall picture more clear.
Market expectations for 25 basis rate cut in June are high, with bets for a total of 75 basis points of ECB interest rate cuts this year, likely in policy meeting in September and December, as the bloc’s economy is now in its sixth straight quarter of economic stagnation and the labor market is starting to soften, supporting the case for rate cuts.