European Central Bank plans a pause before starting to lower interest rates

The European Central Bank (ECB), encouraged by slowing inflation, could pave the way this Thursday for an interest rate cut starting in June.

Christine Lagardethe president of the ECB, said in March that the guardians of the euro did not have “enough confidence” to consider easing their monetary policy.

But now they have reason to be calmer since inflation slowed considerably in the eurozoneup 2.4% annualized in March, 0.2 points less than in February, a larger drop than expected.

The inflation It is close to the goal set by the ECB of 2% in the medium term.

The Board of Governors, which meets on Thursday, will again have to keep rates unchanged, but the meeting “It will be the prelude to a new turning point in the monetary policy of the euro zone: the last stage before the decline,” according to analysts from ING bank.

Unlikely April

The cost of borrowing in the euro zone is at its highest level after the ECB It raised interest at an unprecedented rate for more than a year to contain inflation, which skyrocketed in 2022 due, above all, to the effect of the Russian war in Ukraine.

The reference rate on deposits has remained at its record level of 4% since last October.

The result has been slow economic growth because demand for credit has slowed, affecting consumption and investment by companies and households.

Financial markets have been waiting for signs of a rate cut for months. They expected a cut in April, but several ECB authorities, including the president, have set their sights on June.

Good inflation numbers released last week have revived speculation, with some believing the Frankfurt-based institution is ready to ease inflation. monetary politics and oxygenate the economy.

At the end of March, the Swiss National Bank became the first of the major Western central banks to change course and lower interest rates.

But a surprise like that on Thursday from the ECB is “very unlikely,” according to analysts at Capital Economics.

There are several reasons for this: in June the bank will have a battery of new key indicators on inflationary developments, including monitoring negotiated salaries in the euro zone for the first quarter of 2024.

Which trajectory?

Besides “Signs of economic stabilization in the euro zone, with some improvement in loan growth and confidence indicators, are an incentive not to rush to cut loans.” rates”, according to Carsten Brzeski of ING bank.

As for inflation, it is under control but is likely to follow a less straight trend in the coming months.

In Germany it could “fall up to 2% next month before recovering a little in the following months”, Brzeski indicated.

The actions of the ECB are also limited by that of the US Federal Reserve, whose president, Jerome Powell maintains a cautious speech.

If the ECB gets too far ahead of the Fed In the rate cut, the euro could lose value against the dollar, which would make European imports more expensive and could generate inflation.

“If the data points to a cut in June, a week before the Fed makes its decision, we will likely lower rates in the hope that the Fed will do the same,” commented last week the governor of the Austrian central bank, Robert Holzmann, a member of the Council of Governors of the ECB.

ING economists point out that the ECB will opt for a “slow” rate reduction policy of 25 basis points per quarter.

Lagarde recently said the institution cannot commit to a predefined number of rate cuts. Discussions about this trajectory are expected to dominate Thursday’s meeting.