The European Central Bank left its key interest rate benchmark unchanged on Thursday, choosing to wait for confirmation that sharply declining inflation is firmly under control before cutting rates to support an economy that is reeling. Which is struggling to grow.

Most measures of underlying inflation are declining… but domestic price pressures remain strong and services price inflation is keeping it high, the bank’s rate-setting council said in a statement following its decision.

President Christine Lagarde’s press conference will be scrutinized for hints about a possible drop in rates at future meetings.

The policy meeting at the bank’s skyscraper headquarters in Frankfurt is widely regarded as a prelude to a possible rate cut at the next meeting on June 6, with Lagarde giving a broader signal by saying the bank has more guidance on its inflation path. will know. That meeting.

The decision comes as the world’s rich central banks, including the ECB and the US Federal Reserve, are considering whether they will cut rates if inflation eases – making credit cheaper for businesses and consumers.

It’s a policy change that is being closely watched by equity investors, as the market has been bullish in recent months on hopes of lowering rates by this summer. Broad stock market indexes in the US fell immediately on Wednesday and bond prices rose after a higher-than-expected inflation report raised fears the Fed may have to lower its benchmark interest rate for longer than before. Can wait.

The ECB and other central banks in the developed world are leaning toward undoing some of the sharp increases in interest rates they imposed with the goal of getting inflation under control. The Swiss National Bank was the first major central bank to cut rates in the current cycle on March 21. The big exception is Japan, which raised rates for the first time in 17 years on March 19.

Higher rates help reduce inflation by increasing the cost of borrowing to buy things, which can reduce demand for goods, but if done excessively or maintained for too long it can depress growth. Can also slow down. And at least it can be said that the growth rate in Europe has been weak. The Eurozone economy did not grow at all in the last three months of last year and the outlook for the data from the quarter just ended is also not much better.

The ECB is preparing for a rate cut despite growing uncertainty over the possibility of the US Federal Reserve’s first rate cut. US annual inflation of 3.5% in March and strong US jobs data indicating strong growth have raised questions about whether the Fed will cut the three rates it has signaled for this year. Analysts now think the US cuts may be smaller or come later than originally expected.

Rate cuts could boost stocks because they suggest the central bank sees a strong economy ahead that will boost corporate profits, and because low interest rates make stocks relatively cheaper than interest-bearing holdings like bonds or CDs. Makes more attractive.

The rise in prices in Europe was triggered by an external shock: Russia cut off most supplies of cheap natural gas after its invasion of Ukraine. As the economy bounced back from the pandemic recession, an energy crisis emerged due to disruptions in the supply of raw materials and parts. Those issues have largely diminished as energy prices have fallen to pre-war levels and friction in the supply chain has decreased. But services inflation remains stagnant, and the ECB wants to see more data on wage growth.

While the European energy shock is over, US demand for commodities remains buoyant. According to Eric F. Nielsen, chief economics adviser at UniCredit Group, this means a decline in inflation in Europe is more likely than anticipated. The surge in US inflation was driven more by excess demand than by comparative European inflation, which was created by overly expansionary US fiscal policy, he wrote in an email.

(Only the headline and image in this report may have been reworked by Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

first published: 11 April 2024 | 6:34 pm First

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