The ECB left interest rates unchanged, but is paving the way for a cut

The European Central Bank (ECB) left interest rates unchanged on Thursday for the fifth time in a row, but began setting the stage for a possible cut in June if inflation continues to fall.

The interest rate applicable to the main refinancing operations remains at 4.5%, and the interest rates applicable to the liquidity facility and deposit facility remain at 4.75% and 4.00%, respectively.

Despite keeping interest rates at current levels, the central bank’s position has changed and the institution is open to reducing the current restrictive level of its monetary policy if inflation continues to decline after falling two-tenths in March to 2.4%.

“If an updated assessment of the inflation outlook, underlying inflation dynamics and the strength of monetary policy increases the Governing Council’s confidence that inflation is steadily approaching target, it would be appropriate to reduce the current level of contractionary monetary policy.” This is stated in a statement published following the meeting.

At a press conference, ECB President Christine Lagarde said there would be “more information and more data” in June, in addition to new economic forecasts, which could lead to a change in monetary policy.

Lagarde confirmed that the ECB’s decisions will remain data-driven and will be taken on a meeting-by-meeting basis, with no commitment to “determine a specific rate path in advance.”

However, the central bank president noted that some members of the Governing Council are confident that they will start cutting interest rates now, and that the decision to leave them unchanged does not deserve unanimity.

“Some members (…) felt quite confident based on the limited data we received in April. There were only a few of them and they agreed to join the consensus of a very large majority of governors who felt comfortable about the need to build confidence when we get more data in June,” Lagarde explained.

The ECB President has also attempted to distance herself from the North American Federal Reserve (Fed), ensuring that the ECB depends on data to set its monetary policy rather than on what the North American central bank does, although it recognizes the importance this. happens in other countries.

The ECB president’s remarks came after it was announced on Wednesday that US inflation accelerated in March, which could threaten the Federal Reserve’s interest rate cut expected in June.

The ECB President also said that the cause of inflation in the US and the eurozone is different, as are the political reactions or consumer dynamics, so the measures were different.

In that sense, Lagarde declined to speculate on possible monetary policy decisions the Fed might make once it is confirmed that US inflation rose by three-tenths to 3.5% in March.

In the case of the eurozone, the ECB expects inflation to develop “around current levels in the coming months”, meaning that its fall will not be linear, but will decline until it reaches its 2% target next year.