The European Central Bank has held its interest rates at a record high for a fifth meeting in a row as it awaits key economic data that could be the trigger for it to loosen monetary policy.
The central bank of the 20 eurozone countries elected to hold the deposit rate at 4 per cent, a decision that had been widely anticipated by financial markets.
Inflation has been falling steadily throughout Europe for 18 months, coming down to 2.4 per cent from a peak of about 11 per cent and raising speculation that the ECB will start cutting interest rates soon.
Christine Lagarde, president of the central bank, said that a “very, very large majority” of members of its governing council had wanted to wait for the publication of new economic figures to be released in the run-up to its next meeting in June before deciding whether to cut interest rates. She added that a cut would happen only if this data reinforced the conviction that price pressures were receding.
The ECB’s monetary policy statement included a new sentence that indicated it was preparing to ease financial conditions. It said that “if 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”. However, it added that “domestic price pressures are strong and are keeping services price inflation high”.
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The interest rate on the main refinancing operations, on the marginal lending facility and the deposit facility were left unchanged at 4.5 per cent, 4.75 per cent and 4 per cent, respectively. The euro weakened against the dollar and the pound after the decision.
Lagarde and others have emphasised that wage pressures must ease before they vote to cut borrowing costs. The central bank’s governing council has said it must take into account spring pay growth figures before it can justify lowering rates, prompting speculation that it will move at its June meeting.
Janet Mui, of RBC Brewin Dolphin, the wealth manager, said: “We think the case for the eurozone to cut interest rates earlier and faster than the United States is stronger now. One potential concern for the ECB not to cut rates earlier than the Fed is because such a move may push down the euro further, potentially raising imported goods inflation.”
There has been a rotation in investors’ expectations for interest rate cuts by the big central banks this year after inflation numbers proved higher than expected and amid signs that economies remain resilient.
Figures this week revealed that American inflation had climbed to 3.5 per cent last month, from 3.2 per cent previously and above Wall Street analysts’ expectations. Traders now think that the US Federal Reserve will lower the range of its federal funds rate either once or twice this year from a 23-year high of 5.25 per cent to 5.5 per cent, down from as many as six reductions predicted at the beginning of the year.
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Services and core inflation, which are watched closely by central banks, also remain elevated in Britain and the eurozone.
At its last meeting, the Bank of England said that it could lower interest rates and still maintain its restrictive policy stance, prompting some City analysts to forecast that it would make its first reduction in June, although August or September remain the most likely months. Inflation in the UK has fallen to 3.4 per cent from a four-decade high of 11.1 per cent, while markets now expect two or three interest rate cuts.
