ECB, no cut to rates yet. Lagarde: “Let’s wait for the June data”

Brussels – No change of pace: the shift away from restrictive monetary policy will have to wait, probably until June. Inflation is seen as declining due to a lower energy burden, but the economy still suffers from uncertainty factors that nevertheless remain and cannot be ignored. Given the situation, it is not time to ease monetary policy, and the European Central Bank decides to leave interest rates unchanged (interest rate on primary refinancing operations at 4,5 per cent, interest rate on the marginal lending facility at 4.75 per cent and interest rate on the deposit facility at 4 per cent). The decision made by the ECB Governing Council is, therefore, conservative.

“We have not discussed cuts in this meeting,” points out President Christine Lagarde, who, however, at the end of the meeting, admits that within the room “we started” reasoning on the subject. “We don’t have enough confidence,” she acknowledges. “We see signs, but not enough.” There is little to make a clear decision in a less restrictive sense. “We need more data, and we will have enough data in June,” the Eurotower’s number one says.

Lagarde, therefore, does not promise to ease the constraint as early as April, as some were beginning to speculate, and indeed confirms the setting of a downward revision in mid-2024. Indeed, any interest rate cut in June would still be a measure ahead of the July horizon.

The good news is that Eurotower experts’ latest projections of inflation have been revised downward, particularly for 2024. This is “mainly due to a lower contribution from energy prices,” specifies the note accompanying the decisions taken in Frankfurt. The staff now forecasts an average inflation rate of 2.3 per cent in 2024, 2 per cent in 2025, and 1.9 per cent in 2026. The target thus appears within reach.

This is one reason why the ECB did not change course. Energy-related inflation has been reduced, but not overall inflation. And, Lagarde warns, “the crisis in the Middle East could push up energy prices,” undoing the progress made so far. Moreover, there is no intention to cut rates since, so far, the decisions made are having the desired effect, namely a return toward 2 per cent.

“Financing conditions are tight, and previous interest rate hikes continue to weigh on demand, contributing to lower inflation,” stress the ECB and its president. Onward and upward, then.

However, the other side of the coin is a struggling economic activity due to tensions in the Middle East, the instability in the Red Sea that has ensued, and the ongoing Russian-Ukrainian conflict. After the European Commission, also the ECB staff revised their growth estimates downward, now expected at 0.6 per cent in 2024. The economic activity “is expected to remain subdued in the short term” and then pick up thereafter (1.5 per cent in 2025 and 1.6 per cent in 2026).

Given this situation, the call to eurozone governments is to accelerate the reform agenda. “Faster implementation of the NextGenerationEU program and the removal of national barriers to capital markets can help the investment needed for the real and digital transitions,” Lagarde said— a new call for the implementation of the National Recovery Plan (NRRP), funded through the Recovery Fund embedded in the NextGenerationEu program for post-pandemic recovery.