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ECB expected to hold rates steady when it meets today


The Governing Council of the European Central Bank (ECB) will consider whether to make any changes to interest rates at a meeting in Frankfurt later today.

But markets are not anticipating any alterations at this point, despite steady falls in eurozone inflation.

Analysts do expect though that the ECB will begin trimming rates back from their record highs at its following meeting.

“There will be no change in rates from the ECB on Thursday, although we expect President Lagarde to strongly indicate that a first cut is forthcoming at the bank’s following rendezvous in June,” said Matthew Ryan, Head of Market Strategy at global financial services firm Ebury.

“This week’s meeting will be an exercise in rhetoric for Lagarde. We think that she’ll proclaim that the bank has higher conviction that inflation is returning to target, while repeating that policymakers will have more information in June.”

“She will probably also say that the first discussions on lower rates were had this week, which markets should perceive as a clear indication that a cut is almost certainly on the way at the next meeting.”

In Ireland inflation figures for March will also be released today, with a preliminary estimate last week suggesting the annual rate of consumer price increases last month had fallen below 2% for the first time in almost three years, to 1.7%.

Inflation across the wider eurozone has been falling sharply in recent months, hitting 2.4% last month, not far off the ECB’s 2% target.

Rapid wage growth, seen by the ECB as the single biggest inflation threat, is also slowing, labour markets are softening, investment is weak and bank lending stagnant, all pointing to a further decline in price pressures.

The ECB has kept interest rates steady since September but has already signalled that cuts are coming into view, with policymakers awaiting a few more comforting wage indicators before pulling the trigger.

The only complication could be if the U.S. Federal Reserve delayed its own policy easing, although even that might slow but not stop the ECB given a widening gap in performance of the world’s biggest economy and the 20-country euro zone.

The currency bloc is now in its sixth straight quarter of economic stagnation and the labour market is starting to soften.

Meanwhile, the U.S. economy continues to grow above trend, its labour market remains tight and inflation rose more than expected last month, raising the risk of price growth getting stuck.

“June feels like a compromise between (ECB) doves and hawks,” Deutsche Bank said in a note.

“The hawks accept that the inflation outlook has improved but don’t want to rush into easing as soon as April. The doves may be pleased the hawks are not opposing cuts and are happy to wait until June for a stronger consensus on a cut.”

Policymakers have pointed to a June cut in the 4% deposit rate so often that investors consider it an effective pre-commitment and any walking back would risk damaging the ECB’s credibility.

But ECB President Christine Lagarde is likely to avoid any talk of what happens beyond June, especially as there is little consensus yet on how far and fast interest rates need to fall.

Markets have priced in 80 basis points of cuts this year, or between three and four moves, but these expectations have moved in a wide range.


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