The ECB leaves rates unchanged but hints rate cut as inflation continues to ease

The European Central Bank decided to keep interest rates at record highs during its recent meeting but acknowledged a faster-than-anticipated easing of inflation compared to its earlier projections, following a surge in prices in prices two years ago.

While leaving the main interest rate unchanged at 4.0%, the ECB adjusted its message to reflect a continuous decline in inflation over the past one and a half years and new, lower economic projections.
The ECB stated that most measures of underlying inflation have eased further, but domestic price pressures remain high, particularly due to strong growth in wages.

Despite managing to discourage traders from expecting a rate cut in early spring, the ECB avoided making any firm commitments during the recent meeting. Future decisions are indicated to depend partly on the path of underlying inflation, which has proven to be persistent.

The ECB emphasized that future decisions would be influenced by evidence regarding wage increases and their potential impact on inflation.

According to the latest comments, the ECB is unlikely to reduce borrowing costs before its June meeting, as crucial data on wages will become available in May, with markets anticipating three or four rate cuts this year, bringing the ECB’s deposit rate from 4% to 3.25% or 3.0%.

In its quarterly economic projections, the ECB lowered its forecast for inflation this year from 2.7% to 2.3%, suggesting the possibility of achieving the 2% inflation goal sooner than originally expected, as inflation has been decreasing for nearly 18 months and was at 2.6% in February, driven lower mainly by decline in fuel costs, as well as ECB’s significant increase in borrowing costs.

Despite the overall decline in inflation, underlying inflation, excluding volatile food and energy components, remains at 3.1%, requiring cautious approach to the problem.

The ECB will continue to navigate through a complex economic landscape, carefully considering the trajectory of inflation, wage dynamics, and potential adjustments to interest rates as part of its overall monetary policy strategy, in order to reach its target.