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Europe’s central bank treads carefully on rate cuts

FRANKFURT (XINHUA) – The European Central Bank (ECB) decided to leave key interest rates unchanged and the possibilities open for a rate cut in June.

The three key interest rates remain at historic high levels. According to an ECB statement, the main refinancing operation rate, the marginal lending facility rate and the deposit facility rate stay unchanged at 4.5 per cent, 4.75 per cent and four per cent respectively.

While the central bank sticks to its monetary policies on the whole, it has made clear that a rate cut will be possible depending on the incoming data.

“If our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase our confidence that inflation is converging to our target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction,” said the statement.

Inflation in the euro area has been declining steadily since December last year. It has come down to 2.4 per cent in March, from 2.6 per cent in February, 2.8 per cent in January and 2.9 per cent in December, according to a flash estimate from Eurostat, the statistical office of the European Union.

A Euro sign in Frankfurt, Germany. PHOTO: XINHUA

“Most measures of underlying inflation fell further in February, confirming the picture of gradually diminishing price pressures,” said the statement.

Although unit labour costs remain high in the block, the central bank expects inflation to decline to its target next year after possible fluctuations in the next few months. The inflation reading, among other data, has made a few governing council members sufficiently confident about a rate cut even in April at the rate-setting meeting on Thursday, said ECB President Christine Lagarde in a press conference on Thursday.

A large majority of the governing council members, on the other hand, decided that it would be appropriate to have their confidence reinforced before cutting rates, said Lagarde.

In an attempt to rein in rampant inflation in the euro area, the ECB hiked its key interest rates by a total of 45 basis points in just over a year since July 2022.

The key interest rates have hovered at historic high levels ever since, pushing borrowing costs high, dampening demands and weighing on economic growth in the euro area.

The economy remained weak in the first quarter of this year, the central bank said, expecting a gradual recovery over the year. As the ECB sets the stage for a rate cut, it treads carefully. “In any event, we will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction, and we are not pre-committing to a particular rate path,” said the ECB statement.

The prudence is justified as inflation can fluctuate, as was the case in the United States (US), and any premature rate cut can harm the central bank’s credibility, according to analysts.

“While some market participants had already started to see aggressive ECB rate cuts in the months ahead, yesterday’s US inflation print will have been a good reminder to the central bank that reflation will always be a risk,” global head of Marco division of ING Research Carsten Brzeski said in a note.

The ECB is set to publish its staff projections of economic growth and inflation in the euro area in June.

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