No hint of cuts as ECB keeps rates unchanged at record-high of 4%

The European Central Bank kept interest rates unchanged at a record-high 4% as expected on Thursday and reaffirmed its commitment to fighting inflation, giving no hint that policymakers are even contemplating a start to easing.

The ECB ended its fastest-ever cycle of rate hikes in September but has been adamant that it is too soon to discuss a reversal, since price pressures have not been fully extinguished and many wage negotiations have yet to conclude.
 

Investors are betting that the ECB is getting it wrong on both growth and inflation and will be forced to U-turn and deliver five rate cuts in rapid succession from early spring.
 

 

But ECB policymakers signalled no such pivot and made only slight changes to their statement, repeating longstanding guidance that holding interest rates at the current level for sufficiently long would bring inflation back to their 2% target.
 

"The consensus around the table was that it was premature to discuss rate cuts," ECB President Christine Lagarde told her regular news conference following the decision, insisting that future decisions would depend on incoming data.
 

"We need to be further along the disinflation process to be confident that inflation will be at target - sustainably so." The bank said in its written statement that inflation trends broadly confirmed its previous assessment, but cut a reference in previous statements to elevated domestic price pressures and strong labour cost growth.
 

Lagarde cautioned against over-interpreting such omissions and urged observers to focus more on what content was left in the statement. Market pricing suggested that expectations for an April rate cut had firmed slightly.
 

ECB pushback on early rate cuts has had some impact on markets but investors still see 125 basis points of reductions this year, or five moves, with the first in April or June.
 

Lagarde said growth risks were tilted to the downside and included the restrictive effect of monetary policy, wars in Ukraine and the Middle East and a global economic downturn.
 

Disruptions to trade from attacks by Yemen's Houthi group on shipping in the Red Sea could add to inflation by pushing up energy and freight costs, she warned.
 

"We are observing it very carefully," Lagarde said.
 

Lagarde and ECB chief economist Philip Lane have recently pointed to first-quarter wage settlements, for which figures become available in May, as a relevant gauge, which some have seen as a clue to a first move in June.
 

Lagarde brushed aside such speculation. She pointed to signs that demand for labour was easing and evidence that moderating wage growth was "directionally good from our perspective".
 

"TOO LITTLE, TOO LATE"?
 

The discrepancy in rate expectations stems from a different outlook on growth and how much past rate hikes are slowing economic activity across the 20 countries that use the euro currency - not least in Germany, where the closely watched Ifo survey pointed to worsening business sentiment.
 

"Germany is in absolute hole with no prospect of getting out of it, and yet the ECB seem more worried about inflation than they are about a depression," said Michael Hewson, chief market strategist at CMC Markets in London.
 

The ECB expects household and government spending to drive a recovery but data appear to be painting a bleaker picture, with manufacturing remaining in recession and services cooling.
 

The euro zone was probably in recession last quarter and got off to a slow start in January, making the current quarter the sixth in a row with broadly flat or negative growth. A long-predicted recovery meanwhile keeps getting pushed further out.
 

A weak economy, along with muted commodity prices and high interest rates, should keep stifling inflation, which stood at 2.9% in December and is not currently expected by the ECB to fall back to its 2% target until 2025.
 

Many disagree with that projection.
 

"We continue to expect headline and core HICP inflation rates to fall to 2% already before the middle of this year, a year or more earlier than the ECB forecasts," Deutsche Bank economists said.
 

Lower inflation would mean rising real interest rates, effectively tightening policy in a recessionary environment.
 

"This would raise the risk of an outright recession and a genuine shock to the labour market," Deutsche Bank added.
 

Some think that the ECB's insistence that even more evidence of disinflation is needed for it to act raises the chance of a policy error.
 

"Having overlooked the negative impact of monetary tightening on growth until now, the ECB remains biased towards cutting too little, too late," TS Lombard's Davide Oneglia said.