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ECB to stand pat and urge patience on rate cuts

By AFP - Jan 26,2024 - Last updated at Jan 26,2024

A sculpture of the Euro currency stands in the city centre of Frankfurt am Main, western Germany, on Thursday (AFP photo)

FRANKFURT, Germany — The European Central Bank (ECB) is expected to stand pat on Thursday and call for patience in the ongoing battle against inflation, pushing back against market hopes of rapid interest rate cuts.

The Frankfurt institute launched an unprecedented rate hiking cycle in mid-2022 after Russia's war in Ukraine pushed food and energy costs higher, sending inflation soaring.

With inflation steadily slowing after peaking at more than 10 per cent last year, the ECB is tipped to leave rates unchanged for a third consecutive meeting, keeping the benchmark deposit rate at a record 4 per cent.

The bank's governing council is expected to repeat that it considers rates are currently at levels that "will make a substantial contribution" to returning inflation to the 2 per cent target.

ECB watchers will be more interested in President Christine Lagarde's 13:45 GMT press conference, hoping for clues on when the bank might start slashing borrowing costs given the progress on taming inflation.

Lagarde has already pushed back against market bets of rate cuts starting as early as April, insisting last week it was too soon to "shout victory".

She told Bloomberg television that the first rate cut would "likely" only come this summer and only if the latest data supported such a move, citing economic uncertainties and concern about rising wages.

The US Federal Reserve is facing a similar debate across the Atlantic, where Fed officials have been tempering market expectations of rate cuts as early as March.

While it was appropriate to "ask when would policy adjustments be necessary so we don't put a stranglehold on the economy, it's really premature to think that that's around the corner", San Francisco Fed President Mary Daly told Fox Business.

"We think that neither the ECB nor the Fed is in a hurry to deliver rate cuts," UniCredit said in an analyst note.

 

Wages in focus 

 

Like other central banks, the ECB has been walking a tightrope between raising borrowing costs enough to convincingly rein in inflation without squeezing demand so hard it crashes the economy.

After months of decline, eurozone inflation reaccelerated to 2.9 per cent in December.

The increase was mainly due to the comparison effect with a year earlier, when governments provided exceptional support to help households with energy bills.

More expensive borrowing costs meanwhile have curbed demand for loans and mortgages, contributing to a weakening of the eurozone economy.

Output in the 20-nation currency club shrank by 0.1 per cent in the third quarter of 2023, and analysts see another modest contraction in the fourth quarter.

Lagarde last week said the battle against inflation was "on the right path" overall with the ECB forecasting a return to its 2-per cent goal in 2025.

But she said policymakers were closely monitoring several risk factors that could drive inflation up again, including tensions in the Middle East and the possible fallout on energy costs and supply chains.

The ECB was also keeping a close eye on wage negotiations in the eurozone as workers push for pay rises to compensate for higher living costs, Lagarde said.

In Germany, train drivers were staging a record six-day strike this week, the latest in a series of walkouts over wage disputes in Europe's largest economy.

Lagarde and other ECB officials have indicated they won't have the necessary data on eurozone wage agreements until April or May, bolstering the case for a rate cut at the June meeting at the earliest.

"Lagarde will likely keep the door wide open for a first cut in June without fully committing to it already," Berenberg economists said.

KfW chief economist Fritzi Koehler-Geib said the ECB's wait-and-see approach "can reduce the risk of inflation flaring up again".

"There is widespread agreement among the council members that clarity on wage growth is an essential prerequisite for the start of monetary easing," she said.

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