European Central Bank keeps key interest rate at 4.5 percent

by time news

As of: April 11, 2024 4:01 p.m

The European Central Bank (ECB) is leaving key interest rates in the Eurozone unchanged. The next interest rate meeting is now on June 6th – will the interest rate turnaround come then? There are a few things that point to that.

Although inflation has been falling for months and the economy continues to weaken, the European Central Bank (ECB) is not changing key interest rates in the euro area for the fifth time in a row. The ECB Council decided this at its meeting, as the central bank announced in Frankfurt.

The deposit rate that financial institutions receive from the ECB for parking excess funds, which sets the trend for the financial market, remains initially at 4.0 percent. The main refinancing rate, at which commercial banks can obtain fresh money from the central bank, has been less important for a long time, remains at 4.5 percent.

“Easing” of monetary policy in prospect

At the same time, however, the ECB is taking a new course and is heading for an imminent first interest rate cut. “If its updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission further strengthens the Governing Council’s confidence that inflation is moving sustainably towards the target, an easing of the current monetary policy tightening would be appropriate,” it said Euro Guardian.

Some members of the Monetary Policy Council were already confident that the conditions for a reduction had been met, said ECB President Christine Lagarde after the interest rate meeting. However, they were prepared to join the large majority in the Council, which preferred to wait for additional information in June.

The ECB has been holding on to the record high key rates since September 2023, when it raised interest rates for the tenth time in a row in the fight against inflation. The inflation rate in the euro zone has now fallen to 2.4 percent, after 2.6 percent in February. The ECB’s target of 2.00 percent, which it aims to achieve as the optimal level for the currency area in the medium term, is now within reach. In March 2023 it was 6.9 percent, and in autumn 2022 it was at times over ten percent.

ECB “in the starting blocks”

Economists are now generally expecting a reduction in interest rates in June, which businesses and private borrowers have longed for. The ECB is in the starting blocks, said economist Bastian Hepperle from Hauck Aufhäuser Lamp Privatbank, commenting on the ECB’s decisions. “With her rhetorical shift today, she is opening the door to a rate cut that she will implement in June.” The economy in the euro area is doing rather poorly and the overall inflation rate is already relatively close to the ECB’s target value.

“It is now almost certain that the ECB will start cutting interest rates in June,” said Friedrich Heinemann from the Mannheim research institute ZEW. The question remains open as to how far key interest rates will fall this year. The interest rate decisions would be made from meeting to meeting and depending on the data, said ECB boss Lagarde at the press conference. She could therefore not commit to an interest rate path, including the amount and duration, as long as the figures were not available.

In recent weeks, a number of monetary authorities have expressed the view that the interest rate meeting on June 6th could be the appropriate starting point for the interest rate turnaround. The ECB should then have, among other things, important data on this year’s collective bargaining agreements from the Euro countries. In addition, new economic and inflation forecasts from the ECB economists are expected at the meeting. Recently, the tight financing conditions had caused the economy to weaken.

USA as a warning example?

The ECB could therefore initiate the interest rate turnaround before the US Federal Reserve. On the other side of the Atlantic, the economy is booming, the labor market is robust and, contrary to expectations, inflation has recently risen surprisingly significantly again. Therefore, market participants are now not expecting the first interest rate cut until September.

For Ulrich Kater, chief economist at Dekabank, it is clear: “Despite ongoing discussions, the ECB will probably cut key interest rates in the summer – for the first time before the Fed.” The ECB is not dependent on the Fed’s monetary policy when it comes to timing interest rate increases. The exchange rate no longer has the significance of previous years.

Commerzbank chief economist Jörg Krämer, on the other hand, sees the USA as a “warning example”: “Not only in the USA, but also in the euro area, consumer prices have risen significantly more in recent months than is compatible with the inflation target of two percent in the long term .” This is primarily due to wages continuing to rise sharply. The ECB should therefore “resist the temptation to cut interest rates as early as June.”

Alexander Schmitt, HR, tagesschau, April 11, 2024 2:57 p.m

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