ECB leaves rates unchanged but prepares next cut

The European Central Bank keeps rates firm, but prepares the next cut. The official rate was therefore confirmed at 4% for deposits with the ECB and 4.5% for refinancing operations, in a decision taken by a very large majority but not unanimously: some governors would have preferred an immediate cut. The official communiqué, however, prepares the next steps: while recalling that "domestic price pressures are strong and keep services inflation high", it gives some indications that suggest a cut in June, as is widely expected by markets and analysts.

This is not a commitment, of course. "If the Governing Council's updated assessment of the inflation outlook, the dynamics of core inflation and the intensity of monetary policy transmission were to further increase its confidence that inflation is converging stably towards the target," the Governing Council explained, "it would be appropriate to reduce the current level of monetary policy tightening. The ECB will not, in any case, wait for the decisions of the US Central Bank (which may postpone its first cut): 'We are not dependent on the Fed,' said President Christine Lagarde at a press conference.

It is also, not necessarily, the opening of a new phase. The ECB wants to keep its hands free. "In any case, in order to determine the appropriate level and duration of the tightening, the Governing Council will continue to follow a data-driven approach whereby decisions are defined on a case-by-case basis at each meeting, without binding itself to a particular path of reduction." Thus, no set path in rate cuts will be followed, nor did Lagarde want to define the possible next cut as the opening of a 'season', regardless of the pace, of reducing the cost of credit. With these words, the ECB seems to want to correct market expectations that point instead to an aggressive phase of credit cost reductions: a 0.25 percentage point cut every meeting until the end of the year and even beyond, with a pause, perhaps, in July to assess the effects of the first step.

The decision is supported by a new diagnosis of price developments: 'Wage growth is gradually moderating and companies are absorbing part of the increase in labour costs with their profits'. These are the conditions the ECB has set for a reduction in the cost of money. Inflation, however, Lagarde explained, will continue to fluctuate at current levels for the next few months, proceeding in a non-linear fashion, following a 'bumpy' path, before returning to the target 'next year'. Growth 'remained weak in the first quarter', with services resilient and industry weaker, although moving towards a 'gradual recovery' linked to rising wages and increased exports.