The European Central Bank (ECB) held its key interest rate steady on Thursday, opting to wait for more evidence that the swift decline in inflation is sustainable before considering rate cuts to support the sluggish economy.
The bank’s governing council stated in its post-decision announcement that most underlying inflation indicators are showing signs of improvement. However, persistent domestic price pressures continue to drive up inflation in the services sector.
President Christine Lagarde’s news conference will be closely watched for insights into the potential trajectory of rate cuts in upcoming meetings.
The ECB’s policy meeting, held at its headquarters in Frankfurt, is seen as a precursor to a potential rate cut at the next gathering on June 6. Lagarde’s earlier comment about the bank gaining further insights into inflation trends at that time suggests a move may be on the horizon.
The decision aligns with the broader trend among major central banks, including the ECB and the US Federal Reserve, which are assessing when the easing of inflation may permit rate cuts, thus making borrowing more affordable for businesses and consumers.
Stock investors are keeping a close eye on this potential policy shift, as markets have been buoyed by expectations of interest rate cuts in the coming months. In the US, stock indices dipped on Wednesday while bond prices rose following a hotter-than-expected inflation report, leading to concerns the Fed might delay lowering its benchmark interest rate.
The ECB and other major central banks are considering reversing some of the significant interest rate increases introduced to tackle inflation. The Swiss National Bank was the first major central bank to reduce rates this cycle on March 21. The outlier is Japan, which raised rates on March 19 for the first time in 17 years.
Elevated interest rates help control inflation by increasing borrowing costs, thereby reducing demand for goods. However, if maintained for too long or too aggressively, higher rates can suppress economic growth. The eurozone economy showed no growth in the final quarter of last year, and prospects for the recently ended quarter aren’t much more promising.