Euro Area: ECB stands pat in April, opens door to June cut

Euro Area Monetary Policy April 2024

Euro Area: ECB stands pat in April, opens door to June cut

At its 11 April meeting, the European Central Bank (ECB) kept the main refinancing operations, marginal lending facility and deposit facility rates unchanged at 4.50%, 4.75% and 4.00%, respectively. The hold had largely been expected by market analysts after the ECB delivered 11 consecutive hikes between July 2022 and September 2023—a cumulative increase of 450 basis points. That said, President Lagarde noted that the decision was not unanimous as “a few members felt sufficiently confident” to support a cut. The Bank also restated that it plans to start normalizing its balance sheet by reducing the pandemic emergency purchase programme (PEPP) by EUR 7.5 billion per month on average during the second half of 2024 and discontinuing reinvestments under the PEPP at end-2024.

The decision to stand pat—and thus delay the start of the monetary policy easing cycle—was motivated by still-considerable domestic price pressures despite the ongoing downtrend in inflation. This has been primarily driven by reduced price pressures for food and easing core inflation, along with a moderation in wage growth. That said, services price inflation remains high. Inflation is expected to fluctuate around current levels in the coming months and should decline to the ECB’s 2.0% medium-term target next year amid weaker growth in labor costs, the impact of restrictive monetary policy and the fading effects of the energy crisis.

The Bank sees upside risks to inflation stemming from heightened geopolitical tensions, higher energy prices and resilient profit margins, while downside risks to inflation include monetary policy dampening demand and an unexpected deterioration in the global economic environment. Consequently, the Bank reiterated its commitment to returning to the 2.0% medium-term target by maintaining a sufficiently restrictive monetary policy stance in its future decisions. However, it also stated that adjustments may be made based on data-dependent assessments, implicitly opening the door to a cut at its next meeting due on 6 June, when the majority of our panelists expect the ECB to start easing monetary conditions.

Commenting on the ECB’s decision, ING’s Carsten Brzeski stated:

“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. In fact, the ECB has gone through a very gradual transition of its communication since December, turning from hawkish to dovish. The faster-than-expected drop in headline inflation, as well as anaemic growth, have opened the door for some rate cuts. Not a full reversal of the rate hikes since July 2022, but rather a soft loosening of a still restrictive stance.”

Meanwhile, UOB’s Lee Sue Ann commented:

“Both the press release and conference offered very little, with the emphasis on several occasions that “there is no pre-commitment to any particular path”. We think that even if the ECB moves in June, it will be very cautious and easing will be a very gradual approach. We now look for cuts in June, September and December.”

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