ECB urges patience on interest rate cuts
FRANKFURT: The European Central Bank call for patience in the ongoing battle against inflation, pushing back against market hopes of rapid interest rate cuts.
FRANKFURT: The headquarters of the European Central Bank (ECB) is seen behind a traffic sign in Frankfurt am Main, western Germany. - AFP.
The Frankfurt-based institution launched an unprecedented rate hiking cycle in mid-2022 after Russia’s war in Ukraine pushed food and energy costs higher, sending inflation soaring. With inflation steadily slowing after peaking at more than 10 percent last year, the ECB left rates unchanged for a third consecutive meeting, keeping the benchmark deposit rate at a record four percent.
The bank’s governing council repeated that it considered rates are currently at levels that “will make a substantial contribution” to returning inflation to the two-percent target. ECB watchers will be more interested in president Christine Lagarde’s press conference, hoping for clues on when the bank might start slashing borrowing costs given the progress on taming inflation. Lagarde has already pushed back against market bets of rate cuts starting as early as April, insisting last week it was too soon to “shout victory”. She told Bloomberg television that the first rate cut would “likely” only come this summer and only if the latest data supported such a move, citing economic uncertainties and concern about rising wages.
In no hurry
The US Federal Reserve is facing a similar debate across the Atlantic, where Fed officials have been tempering market expectations of rate cuts as early as March. While it was appropriate to “ask when would policy adjustments be necessary so we don’t put a stranglehold on the economy, it’s really premature to think that that’s around the corner,” San Francisco Fed President Mary Daly told Fox Business. “We think that neither the ECB nor the Fed are in a hurry to deliver rate cuts,” UniCredit said in an analyst note.
Elsewhere, Norway’s Norges Bank held its benchmark rate at 4.5 percent on Thursday and said it would likely remain there “for some time”. Like other central banks, the ECB has been walking a tightrope between raising borrowing costs enough to convincingly rein in inflation without squeezing demand so hard it crashes the economy. After months of decline, euro-zone inflation reaccelerated to 2.9 percent in December. The increase was mainly due to the comparison effect with a year earlier, when governments provided exceptional support to help households with energy bills.
Euro-zone contraction
More expensive borrowing costs have curbed demand for loans and mortgages, contributing to a weakening of the euro-zone economy. Output in the 20-nation currency club shrank by 0.1 percent in the third quarter of 2023, and analysts see another modest contraction in the fourth quarter. Lagarde last week said the battle against inflation was “on the right path” overall with the ECB forecasting a return to its two-percent goal in 2025.
But she said policymakers were closely monitoring several risk factors that could drive inflation up again, including tensions in the Middle East and the possible fallout on energy costs and supply chains. The ECB was also keeping a close eye on wage negotiations in the euro-zone as workers push for pay rises to compensate for higher living costs, Lagarde said.
Lagarde and other ECB officials have indicated they won’t have the necessary data on euro-zone wage agreements until April or May, bolstering the case for a rate cut at the June meeting at the earliest. — AFP
“Lagarde will likely keep the door wide open for a first cut in June without fully committing to it already,” Berenberg economists said. KfW chief economist Fritzi Koehler-Geib said the ECB’s wait-and-see approach “can reduce the risk of inflation flaring up again”. “There is widespread agreement among the council members that clarity on wage growth is an essential prerequisite for the start of monetary easing,” she said.- AFP.
