ECB holds rates steady, but contemplates cut pending favorable conditions

Brussels – The situation shows signs of improvement, as well as uncertainties. That is why it is not time to cut rates, and the European Central Bank Governing Council has decided not to do so. For the fifth time in a row, the ECB is leaving unchanged the interest rate on primary refinancing operations (at 4.5 per cent), the interest rate on the marginal lending facility (at 4.75 per cent), and the interest rate on the deposit facility (at 4 per cent). However, it has started contemplating the cut,  which may arrive in June.

The key passage of ECB President Christine Lagarde’s press conference is peppered with ‘ifs’. It means that the right conditions for a cut are needed. In any case, she explains, “If the Governing Council’s updated assessment of the inflation outlook, the dynamics of core inflation, and the strength of the monetary policy transmission were to increase further confidence that inflation is converging to the target on a sustained basis, it would be appropriate to reduce the current level of monetary policy tightening. And thus cut rates.

Regardless of what may happen from now on, “we are not committing ourselves in advance to a particular path,” Lagarde again clarifies. There is no reasoning about the numbers, in essence. The extent of any easing of monetary policy measures will depend on the data, first and foremost. And here, Lagarde wants to be even clearer: “We depend on the data, not on the Fed.” In Frankfurt, of course, people look to the United States and the moves that the U.S. Central Bank may take, but the ECB President once again asserts the independence of her institution.

The data at hand allows Lagarde to publicly acknowledge that the reasoning behind the possible reduction of the level of interest rates is ongoing. At present, explains the Eurotower’s number one, “We expect that inflation will fluctuate around current levels in the coming months and then decline to our target of 2 per cent next year.” Uncertainty remains, however. “Risks to inflation rise include tensions in the Middle East, which could produce new increases in energy prices and disruptions in supply chains. This could call into question the reasoning behind the cuts.

Therefore, the call to make reforms remains valid. Lagarde calls again for “rapid and effective implementation” of national recovery plans (NRPs) by all. Doing so could support “innovation and increase investment in green and digital transitions,” driving competitiveness and growth. Emphasis and invitations are not coincidental, given that “the risks to economic growth remain on the downside.”