2024.01.2512:55:00UTC+00ECB Keeps Rates Unchanged For Third Time

The European Central Bank held its key interest rates steady for a third policy session in a row and stuck to its stance that policy would remain restrictive for as long as needed, and did not give any signal regarding the possibility of a rate cut in the near future.

The Governing Council, led by ECB President Christine Lagarde, left the main refinancing rate, or refi, at 4.50 percent on Thursday, in the first rate-setting session of the year.

The deposit facility rate was retained at a record high 4.00 percent and the lending rate was kept at 4.75 percent. Markets expect the ECB to embark on an easing spree by the middle of this year as inflation has started to show signs of slowing. However, ECB policymakers are inclined to look through the recent sharp easing in headline inflation as they think the specter of inflation has not gone away. That is because of the still strong core inflationary pressure, and rising risks in the form of pending wage settlements and geopolitical tensions such as the Red Sea conflict. The ECB's forward guidance on interest rates was unchanged.

The central bank reiterated its assessment that "...the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal [return inflation to 2 percent target]."

"The Governing Council's future decisions will ensure that its policy rates will be set at sufficiently restrictive levels for as long as necessary," the bank added.

The ECB had raised rates by a cumulative 400 basis points with hikes in every policy session of the most aggressive tightening cycle that began in July 2022. This came to an end in September.

ING economist Carsten Brzeski said the ECB is unlikely to consider rate cuts as long as actual inflation remains closer to 3 percent than 2 percent.

The economist said it would require a severe recession or a sharp drop in longer-term inflation forecasts to clearly below 2 percent to see a rate cut in the coming months for the ECB to start discussing policy easing.

"We continue seeing a first rate cut not before the summer," Brzeski added. Capital Economics continue to expect a rate cut in the second quarter.

The firm's economist Jack Allen-Reynolds said ECB policymakers want to see more evidence of weaker wage growth before lowering interest rates. However, the economic outlook is weaker than they expected and if core inflation keeps falling more quickly than the bank forecasts, cuts could come in April or June, the economist said.