Euro Drops After ECB Holds Rates, No Signals of Future Cuts

The
bank
reiterated
it
would
keep
rates
high
“as
long
as
necessary”,
but
the
big
question
is
how
long
that
might
be.
The
introductory
statement
left
this
unanswered.

When
Will
The
ECB
Start
Cutting
Rates?

“Despite
cautious
tones
from
the
ECB,
we
believe
rate
cuts
are
likely
to
come
sooner
rather
than
later,
with
record
high
interest
rates
giving
the
bank
plenty
of
room
to
maneuver
in
2024”,
says
Michael
Field,
European
market
strategist
at
Morningstar.

In
recent
weeks,
ECB
President
Christine
Lagarde
has
been
pushing
back
on
aggressive
bets
by
the
market
on
interest
rate
cuts.
”Of
course,
central
bankers
are
not
happy
with
added
pressure
from
investors
to
cut
rates,
however,
given
the
fragile
state
of
the
European
economy,
and
with
inflation
down
to
just
2.9%
in
December,
we
believe
the
stars
are
aligning
for
pending
rate
cuts”,
Field
says.
 

Financial
markets
are
pricing
in
that
the
ECB
will
begin
cutting
key
interest
rates
in
the
spring,
with
four
more
cuts
to
follow
later
in
the
year;
some
150
basis
points
of
cuts
are
expected
in
2024.

In
Thursday’s
statement,
the
ECB
reaffirmed
its
commitment
to
reducing
inflation
further
toward
the
targeted
2%
level,
with
the
belief
that
current
rates
are
at
the
right
levels
to
achieve
this.
“We
would
however
point
to
how
quickly
and
far
inflation
has
fallen,
as
well
as
the
trajectory,
in
support
of
rate
cuts”,
according
to
Field.

“Ultimately,
with
the
economy
teetering
on
recession
and
inflation
in
the
right
ball-park
at
least,
we
believe
the
ECB’s
focus
may
soon
shift
toward
a
more
balanced
approach
of
managing
inflation
alongside
economic
activity.”

“The
ECB
dropped
two
phrases
that
could
be
interpreted
as
opening
the
door
to
rate
cuts
but
could
also
have
been
dropped
because
there
are
no
new
forecasts:
one
on
domestic
price
pressure
being
elevated
and
one
on
a
temporary
pick
up
in
inflation”,
adds
Carsten
Brzeski,
chief
economist
at
ING
Germany
on
X
(formerly
Twitter).

Core
Inflation
Continues
to
Fall

The
ECB
confirmed
its
previous
assessment
of
the
medium-term
inflation
outlook:
the
downward
trend
in
underlying
inflation
has
continued,
aside
from
an
energy-related
upward
base
effect
on
headline
inflation.

Recent
interest
rate
increases
seem
to
be
helping:
“tight
financing
conditions
are
dampening
demand,
and
this
is
helping
to
push
down
inflation”,
the
bank
said.

While
many
wage
negotiations
are
ongoing,
Lagarde
told
journalist
that
the
ECB
wage
tracker
is
stabilising.

Eurozone
Economy
Remains
Fragile

Recent
macroeconomic
data
stoked
fears
the
single-currency
area
might
be
headed
toward
a
recession.
Germany’s
Ifo
business
climate
index
was
the
latest
weak
reading
as
it
fell
from
86.3
to
85.2.
Together
with
the
recent
fall
in
industrial
production,
this
suggests
that
the
GDP
of
Europe’s
largest
economy
will
contract
again
in
the
first
quarter.

Next
week,
the
Federal
Reserve
and
Bank
of
England
are
set
to
announce
their
rate
decisions.
Last
year,
markets
expected
that
central
banks
would
start
cutting
rates
simultaneously,
and
that
is
why
even
here
in
Europe
there
was
such
a
focus
on
the
Fed,
according
to
Morningstar’s
Field.

But
the
US
economy
is
in
danger
of
overheating
and inflation
is
up
once
more,
so
the
Fed
has
a
more
difficult
task
on
its
hands,
Field
adds.
In
that
way,
uropeans
should
not
be
looking
to
the
US
to
lead
the
way
in
monetary
easing.

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