The European Central Bank kept interest rates unchanged for the fifth consecutive time as scheduled, but issued a clearer signal of "cutting interest rates."
On April 11, the European Central Bank announced its April 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 mid-2022, the European Central Bank has raised interest rates ten times in a row, raising the deposit rate to 4%, and has now kept interest rates unchanged for the fifth time in a row.
It is worth mentioning that the European Central Bank hinted that it will cut interest rates, saying that most underlying inflation indicators are slowing, and if we believe that inflation will reach 2%, interest rates may fall, sending a clearer "rate cut" signal.
After the announcement of the ECB's decision, traders' expectations for the extent of the ECB's rate cut remained stable, with a rate cut expected to be 19 basis points by June.
The EURUSD fell by about 10 points in the short term to 1.0722. European stocks maintained their decline.
Inflation continues to decline, European Central Bank hints at interest rate cut
The European Central Bank noted that inflation is slowing, paving the way for future interest rate cuts.
Regarding inflation, the European Central Bank stated:
Inflation continued to fall, driven mainly by lower food and commodity price inflation.
Most core inflation measures are moderating, and wage growth is also gradually moderating.
The current price pressure has kept service price inflation at a high level.
At the same time, the European Central Bank pointed out:
If we are confident that inflation will fall towards 2%, interest rates may be lowered.
Furthermore, the ECB noted:
Tight financing conditions are putting pressure on demand.
Inflation has slowed sharply and the economy has continued to weaken. Corporate loan demand has dropped significantly. The conditions for the European Central Bank to cut interest rates are ripe. The market almost unanimously believes that the European Central Bank will start to cut interest rates in June.
The ECB reiterated at this meeting that it is still determined to ensure that inflation returns to 2% in a timely manner and does not preset a specific interest rate path. It will continue to adopt a data-dependent and meeting-by-meeting approach to determine the appropriate level and duration of restrictive interest rates.
In terms of asset purchases, the European Central Bank reiterated that it will begin to reduce the investment portfolio of the Emergency Anti-epidemic Purchase Program (PEPP) in the second half of the year, with an average reduction of 7.5 billion euros per month, and intends to stop reinvestment under the Emergency Anti-Epidemic Purchase Program at the end of 2024.
In addition, the ECB stated that it will regularly review the contribution of targeted long-term refinancing operations (TLTRO) to the policy stance.
Analysts cautiously optimistic about rate cuts
Analyst Jana Randow commented on the European Central Bank’s interest rate decision:
It was an interesting policy statement as the ECB prepares for a rate cut, with the ECB saying the latest information broadly confirms their inflation expectations.
Deutsche Bank believes that the possibility of consecutive interest rate cuts by the European Central Bank may decrease, Deutsche Bank economist Mark Wall said:
The European Central Bank is increasingly optimistic that conditions for easing policy are forming. No one will be surprised by a rate cut in June after the European Central Bank left interest rates unchanged today.
The question is whether the central bank's cautious approach to domestic inflation means that consecutive interest rate cuts in June and July are less likely. In its monetary policy statement, the European Central Bank said strong domestic price pressures were keeping services price inflation high, suggesting that the pace of making policy less restrictive would be more gradual.
However, there are also analysts who have doubts about the future interest rate path of the European Central Bank. Analyst Alexander Weber said:
It's difficult to extrapolate from the ECB policy statement where interest rates will go after the initial cut. The ECB made clear that it "will not pre-commit to a particular interest rate path," reiterating comments made by Lagarde in a speech last month. The governor will likely still face many questions on this issue.