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Investing.com — The European Central Bank held interest rates at record highs as expected, as policymakers search for more proof that sticky inflationary pressures are sustainably easing.
But the ECB revised projections for inflation down, in particular for the current year, citing a decreased contribution from energy prices. Price growth is now expected to average 2.3% in 2024 — slower than a prior forecast of 2.7% — before further decelerating to the ECB’s stated 2.0% target in 2025 and 1.9% in 2026.
Despite signs of cooling price gains following a sudden uptick two years ago, officials at the central bank overseeing the 20-country eurozone currency bloc have been recently unwilling to roll out borrowing cost reductions early this year. In its most recent policy statement, the ECB echoed this reticence, indicating that its fight to corral price pressures was not yet over.
“Although most measures of underlying inflation have eased further, domestic price pressures remain high, in part owing to strong growth in wages,” it said, adding that interest rates are now at levels that it believes could make a “substantial contribution” to bringing price gains down to 2%.
The ECB’s key deposit rate was left at 4.0%, while the interest rate on its marginal lending facility and main refinancing operations stayed at 4.75% and 4.5%, respectively.
Analysts are now focusing on the ECB’s communication regarding future policy moves, with many curious to see if the central bank will attempt to pave the way for an interest rate cut as soon as June. In a press conference following the decision, ECB President Christine Lagarde said that while “progress” is being made in extinguishing inflation, rate-setters are not “sufficiently confident” that the trend is sustainable.
“We clearly need more evidence, more data,” Lagarde said. “We will know a little more in April, but we will know a lot more in June.”
Meanwhile, the ECB lowered its growth estimate for 2024 to 0.6% from a prior estimate of 0.8%, adding that activity is “expected to remain subdued in the near term.” However, the economy is seen picking up to 1.5% in 2025 and 1.6% in 2026 thanks to a recovery in consumption and investment.
“While the worsening of the eurozone’s economic outlook and further fading away of (headline) inflationary pressures would argue for rather imminent smaller rate cuts to bring some relief, stubborn underlying inflation, particularly services inflation, uncertainty regarding wage developments and the never-ending confidence in an economic rebound in the eurozone still prevent the ECB from cutting rates – at least for now,” analysts at ING said in a note.
Both benchmark 10-year and rate-sensitive 2-year German bond yields fell in the wake of the announcement. Yields typically move inversely to prices.
Source: Investing.com