The European Central Bank (ECB) is expected to maintain record-high interest rates on Thursday and gradually consider reducing them in the coming months due to a persistent decline in inflation.
Having previously responded slowly to a sudden inflation surge two years ago, the ECB, covering 20 eurozone countries, is cautious about declaring victory over the severe inflation experienced in decades.
Anticipated to keep the policy rate at 4.0%, ECB policymakers are likely to emphasize the need for more evidence that inflation is under control, and ongoing wage increases won't exacerbate the situation.
The new economic projections from the ECB are likely to indicate lower economic growth and inflation this year, potentially requiring a nuanced adjustment in their communication.
Frederik Ducrozet, Head of Macroeconomic Research at Pictet Wealth Management, expects a neutral policy stance, with balanced communication recognizing progress on inflation but avoiding premature victory declarations. Sources suggest the ECB is unlikely to reduce borrowing costs before its June 6 meeting, as crucial wage data will only be available in May.
The ECB's Chief Economist, Philip Lane, has hinted at a possible series of rate cuts, and investors anticipate three or possibly four reductions by year-end. Inflation, which stood at 2.6% in February, slightly above the 2% target, has been influenced by a sharp drop in fuel costs and the ECB's record-high increase in borrowing costs.
The ECB is set to announce its rate decision at 1315 GMT, followed by a press conference by ECB President Christine Lagarde at 1345 GMT.
Inflation, especially core inflation, remains uncertain due to unclear wage developments, according to ECB policymakers Peter Kazimir and Joachim Nagel. The quarterly macroeconomic projections, to be released on Thursday, are likely to reflect a downward trend in inflation expectations for 2024 and a cut in GDP growth projections for the same year, particularly in Germany.
Concerns about lagging growth and inflation have led some members of the ECB's Governing Council to discuss an upcoming rate cut, with June being mentioned as a likely date by Greece's Yannis Stournaras.
However, the ECB President Christine Lagarde may face challenges in navigating a divided Governing Council and may refrain from committing to specific actions beyond acknowledging internal debates.
Additionally, Lagarde may face inquiries about the ongoing review of the ECB's framework and potential changes to steer market rates in an era of higher inflation, as well as addressing the central bank's increasing losses, though no official announcement is expected until later this month, at the earliest.
Paraphrasing text from "Investing" all rights reserved by the original author.
