ECB Holds Interest Rates Steady, Signals June Cut... "Relying on Indicators, Not the Fed" (Comprehensive)

"We rely on data, not the Federal Reserve (Fed)." (Christine Lagarde, President of the European Central Bank (ECB))

[Image source=EPA Yonhap News]

The European Central Bank (ECB) kept its key policy rates unchanged but hinted at the possibility of a rate cut in June. This suggests that the ECB may move to cut rates before the U.S. Federal Reserve (Fed), which is showing caution due to concerns over a rebound in inflation.

On the 11th (local time), the ECB announced at its monetary policy meeting that the key interest rate was held steady at 4.50% per annum, with the deposit rate and marginal lending rate also unchanged at 4.00% and 4.75% per annum, respectively. The ECB had raised rates ten consecutive times from July 2022 through September last year, and has maintained a pause for five consecutive meetings since October last year.

In its monetary policy statement, the ECB said, "If we are confident that inflation is consistently converging to the target, it would be appropriate to lower the restrictive level of monetary policy," adding that "the ECB’s key interest rates are making a significant contribution to the ongoing disinflation (slowing inflation)."

ECB Opens Door to June Rate Cut...First Mention of Monetary Easing in Statement

Currently, the market consensus is that the ECB will make its first rate cut at the June meeting. The phrase 'for a sufficiently long duration' related to maintaining current rates was removed from the statement, and the statement added that current rates contribute to disinflation. Previously, there was no direct mention of monetary easing in the statement.

Christine Lagarde, who had earlier signaled the possibility of a June rate cut, reaffirmed this stance at the press conference. She said that the inclusion of references to monetary easing in the policy guidance document is "important" and "clearly and loudly shows the voices within the ECB." It is reported that some officials have already advocated for a rate cut this month.

Carsten Brzeski, strategist at ING, said, "This is the first time the ECB has mentioned a rate cut in an official policy announcement," evaluating that "the door to a June rate cut has been officially opened." Jack Allen Reynolds, economist at Capital Economics, also analyzed that "this shows a very high likelihood of a rate cut in June." Holger Schmieding, chief economist at Berenberg Bank, said, "If there is no significant inflation in the next two months, a June rate cut seems certain."

The Eurozone’s March Consumer Price Index (CPI) inflation rate, released last week, came in at 2.4%, well below expectations. At the March meeting, the ECB also lowered its inflation forecast for this year from 2.7% to 2.3% in its economic outlook update. The next update is scheduled for June. Economic media CNBC added that June will also be the first month when officials review the full dataset on first-quarter wage negotiations, which could have potential inflationary effects.

Contrasting with the Fed’s Growing Inflation Concerns

If the ECB moves to cut rates in June, it will be the first among major central banks to shift policy ahead of the U.S. Fed. When asked whether stronger-than-expected U.S. inflation data could affect the ECB’s rate cut trajectory, Lagarde said, "The U.S. is a very large market and the center of finance, so everything that happens will be included in our forecasts," but added, "We rely on data, not the Fed."

However, some analysts believe that with diminished expectations for Fed rate cuts, the ECB may find it difficult to pursue aggressive easing. The Fed is currently facing concerns about the so-called 'last mile'?the final phase before reaching its inflation target?as recent CPI inflation has rebounded. Although the March dot plot maintained the possibility of three rate cuts this year, some Fed officials have recently suggested only two, one, or even no cuts might be possible.

The Wall Street Journal (WSJ) noted that "the ECB could cut rates ahead of the Fed," but warned that such a move would inevitably impact markets, including government bond yields and a weaker euro.

Jason Davis, global rates portfolio manager at JP Morgan, predicted, “Considering the importance of the U.S. economy and differences in monetary policy’s impact on inflation, the interest rate gap between the two central banks will not widen significantly.” Deutsche Bank also analyzed in an investor memo that "as time passes and the situation normalizes, the interest rate differential between the U.S. and the Eurozone will become relatively more important," and that "the Fed’s policy rates could have a greater influence on the ECB."