The rate cut in the eurozone is taking a little more shape. Although it still lacks definition, the European Central Bank (ECB) is paving the way for a reduction in June after leaving interest rates unchanged yesterday. A decision expected at a board meeting seen more as a transition than anything else. The president of the entity, Christine Lagarde, made a sentence of the council’s statement particularly her own to say that if inflation continues to fall, “it would be appropriate to reduce the current level of monetary policy restriction”, with the main reference at 4.5%. So far the hints, because he didn’t want to talk about dates or plans. “We are not committing ourselves beforehand to a particular type of plan”, he reiterated several times. June wins points, despite the fact that the unknown will not be clarified until then. “In June we will have a lot more data and a new projection”, said the French banker. At yesterday’s meeting some member of the council – he did not want to reveal how many – was already ready to make a reduction, but he ended up adding to the majority that chooses to wait. As match to match, meeting to meeting…
The ECB measures three key points to make decisions. Inflation prospects, the evolution of the underlying and the transmission of monetary policy. With the current scenario, the rates are appropriate and “help in the disinflation process”, defended Lagarde. Data in hand, inflation in March marked 2.4% in the eurozone after three consecutive falls, when a year ago it was 7%. The ECB knows that inflation is falling, little by little, towards the 2% target, although it wants to “reinforce confidence that things are going in the right direction”. Prices are falling, wage increases are moderating and companies are absorbing cost growth in profit, the ECB says. But it reduces the rate in services. “Internal inflationary pressures are intense and keep service inflation at high levels (4%)”, it warns. With “a data-dependent approach”, we want to reach June to see above all what wages have done at the beginning of the year. The fear is that higher wages will in turn feed the increase in prices. It is also necessary to finish dismantling the scaffolding of energy aid after the invasion of Ukraine, to see the evolution of crude oil or of the eurozone economy itself, which barely escapes zero growth. Lagarde asks for calm to be 100% sure of what is being done, while drawing a downward trend: “The direction is clear”, she said.
What seemed like the lagging student can become the one who puts himself in front. On the other side of the Atlantic, multiple rate cuts by the Federal Reserve this year were expected. The fact is that we have already reached April and there are more doubts than before. American inflation has just picked up and upset expectations of cuts from the Fed, with rates at 5.25%-5.5%. Lagarde acknowledges that she is attentive to what is happening in the USA, but points out that it is still another factor that must be taken into account because the monetary policy of the eurozone is set from here, oriented towards the European citizen. “We depend on the data, not on the Fed.” In the markets, this served as a relief after the surprise of the previous day in American inflation, despite the falls in the stock market. “Once the ECB starts cutting rates, we think it will be cautiously in conventional steps of 25 points,” noted Konstantin Veit, of Pimco.
