The European Central Bank kept interest rates unchanged for the fourth consecutive time as scheduled, reaffirming its determination to ensure that inflation returns to its 2% target.

On March 7, the European Central Bank announced its March interest rate resolution. As expected, it unanimously maintained the three main interest rates of the European Central Bank unchanged, maintaining the main refinancing interest rate, deposit facility interest rate, and marginal lending rate at 4.5%, 4%, and 4.75%. Historical highs.

Since the European Central Bank announced an interest rate hike for the tenth time in this interest rate hike cycle last September, this is the fourth consecutive time that the bank has chosen to maintain the current interest rate level. The timing of the first interest rate cut and the extent of this year's interest rate cut have become the focus of market attention.

At the same time, the European Central Bank announced its latest quarterly economic forecast. As expected, it lowered its economic growth forecast for 2024 and 2026, while the economic growth forecast for 2026 remained unchanged. It also lowered its overall inflation forecast for 2024 and 2025, with overall inflation expected to rise in 2025. To reach the 2% target, the core inflation forecast has also been revised downwards.

Traders have increased expectations for an interest rate cut by the European Central Bank, with a rate cut of 100 basis points expected in 2024.

After the announcement of the European Central Bank's decision, the euro fell 10 points against the dollar in the short term and is now at 1.0884. The Euro Stoxx 600 index expanded its gains to 0.7% after the European Central Bank's decision.

Reduce inflation and economic growth forecasts to prepare for interest rate cuts?

As expected, the European Central Bank lowered its inflation and economic growth forecasts. Specifically:

Economic growth: GDP is expected to grow by 0.6% in 2024, compared with the previous forecast of 0.8%. GDP is expected to grow by 1.5% in 2025, compared with the previous forecast of 1.5%. GDP is expected to grow by 1.6% in 2026, compared with the previous forecast of 1.5%.

Overall inflation: Inflation is expected to be 2.3% in 2024, compared with the previous forecast of 2.7%. Inflation is expected to be 2% in 2025, compared with the previous forecast of 2.1%. Inflation is expected to be 1.9% in 2026, compared with the previous forecast of 1.9%.

Core inflation: Core inflation is expected to be 2.6% in 2024, compared with the previous forecast of 2.7%. Core inflation is expected to be 2.1% in 2025, compared with the previous forecast of 2.3%. Core inflation is expected to be 2% in 2026, compared with the previous forecast of 2.1%.

In terms of inflation, the ECB pointed out that in the latest ECB economic forecast, inflation expectations have been lowered, especially in 2024, mainly reflecting the decline in energy prices.

In terms of economic growth, the European Central Bank said that economic activity is expected to remain subdued in the short term as tight monetary policy limits financing and suppresses demand.

Determine interest rate path based on data

The ECB noted that domestic price pressures remain high, partly due to wage levels.

The current level of interest rates will make a significant contribution to bringing inflation to 2%, and sufficient restrictive policies will be formulated when necessary. It reiterated its determination to ensure that inflation returns to the 2% target and will determine the path of interest rates based on data.

In addition, the European Central Bank reiterated that it plans to start reducing the Emergency Epidemic Purchase Program (PEPP) investment portfolio in the second half of the year, and the reinvestment of the Emergency Epidemic Purchase Program (PEPP) will continue until the end of 2024.

Justin Low, an analyst at financial website Forexlive, pointed out:

The language in the ECB statement was essentially the same, except for lowering its inflation and economic growth forecasts. The downward revision simply reflects that the ECB is preparing for rate cuts in the coming months. Beyond that, there's nothing new in the forward guidance or a hint of a clear bias toward a rate cut - at least for now.

However, some analysts also pointed out that the European Central Bank’s interest rate statement did not change. Saltmarsh Economics analyst Marchel Alexandrovich said:

The ECB's interest rate statement did not have a meaningful turn, with some downward revisions to the inflation data, but the magnitude of the revisions did not increase the likelihood of an immediate rate cut.

Most investment banks such as Deutsche Bank and Goldman Sachs almost unanimously believe that the first interest rate cut will come in June. Economic resilience exceeds previous expectations and concerns about continued high inflation support the European Central Bank to postpone interest rate cuts. At the same time, UBS, which has a more "hawkish" attitude, believes that if inflation drops significantly in February and March, the possibility of a first interest rate cut in April still exists.