European Central Bank holds interest rates at 4%

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The European Central Bank held interest rates at all-time highs on Thursday but signalled it was considering a cut at its next meeting in June.

The ECB said after its governing council met in Frankfurt that its benchmark deposit rate would stay at 4 per cent until rate-setters were sure price pressures had stabilised.

In a shift from previous language, the ECB said it “would be appropriate” to cut rates if underlying price pressures, its updated forecasts and the impact of previous rate rises increased its confidence that inflation was closing in on its 2 per cent target “in a sustained manner”.

Eurozone inflation has fallen from a 2022 peak of 10.6 per cent to 2.4 per cent in March — tantalisingly close to the bank’s target.

“Even if the policy announcement does not explicitly mention June as the moment for a first rate cut, we think that today’s meeting should mark the final stop before the cut,” said Carsten Brzeski, head of global macro research at Dutch bank ING.

ECB president Christine Lagarde told reporters that inflation was expected to “fluctuate” in the coming months before falling to its target next year, but she pointed to signs of slowing wage growth, adding: “Risks to economic growth remain tilted to the downside.”

The euro, interest-sensitive two-year German Bund yields, and the Stoxx Europe 600 index were all roughly flat on the day after the central bank’s statement.

However, traders in swaps markets slightly downgraded the likelihood that the ECB will begin cutting rates in June to 70 per cent, from 75 per cent earlier in the day.

Markets’ rate cut expectations have been shaken by data this week showing US inflation rose more than expected in March.

Investors have responded by slashing their bets on Federal Reserve rate cuts, to which they now ascribe only a 50 per cent likelihood before September.

The market moves in the US have also led traders to scale back their expectations of how many rate cuts the ECB and Bank of England will make over the course of the year.

Some eurozone policymakers, as in the UK, may want to avoid cutting rates much more aggressively than their counterparts in the US, partly out of fear of weakening their currencies and so further stoking inflation.

But Peter Schaffrik, a strategist at RBC Capital Markets, said: “The ECB has nailed its colours to the mast and shifting the guidance at this stage when actual inflation numbers are currently not far away from their own forecasts seems difficult to imagine.”