ECB keeps rates unchanged but without any signal of rate cuts

The European Central Bank kept interest rates unchanged, in line with expectations and repeated it will continue to fight inflation, but remained completely silent regarding potential policy easing, which markets widely expect to start later this year.

It is clear that ECB’s historical rate hiking cycle is over, but the policymakers stick to their stance that any policy easing at this stage would be premature.

The ECB’s Governing Council considers that the key interest rates are at levels that, maintained for a sufficiently long duration, will provide substantial contribution to their primary task – bringing inflation back to 2% target.

On the other hand, market participants think that the ECB assessment of growth and inflation is wrong and will eventually force the policymakers to deliver several rate cuts as early as spring this year.

The central bank said that inflation trends move broadly in line with their previous assessment, but it removed a remark about elevated domestic price pressures and strong labor cost growth.

The ECB also said that their future approach will be data-dependent, reflecting their stance in not committing to any particular policy, but keeping the right to act and adjust interest rates, according to economic conditions.

The other serious problem is different outlook on growth and the grade of negative impact from record high borrowing cost bloc’s economic activity.

The ECB expects recovery to pick up in coming months, with government spending and households to be main drivers, though recent economic data continue to darken the picture by signals that activity in dominant services sector is cooling and manufacturing is in recession.

Overall outlook remains gloomy, as economic growth remains flat or negative and inflation is elevated and not expected to return to 2% target until 2025, though some economists are more optimistic and expect inflation to fall to 2% in mid-2024.