ECB: 'Premature' to discuss a rate cut

Firm rates, as long as necessary. Economic scenario unchanged. It is almost laconic the communiqué to which the European Central Bank entrusted the substance of the January monetary policy meeting, for which there were no great expectations. The refinancing rate remains at 4.50%, the rate on deposits - still very important after the huge securities purchases - at 4% and the rate on marginal lending facilities, for emergency refinancing operations, at 4.75%. Discussing cuts, however, was deemed 'premature' advice, President Christine Lagarde explained at a press conference.

The economic scenario is unchanged: inflation continues to fall, despite the 'base effect upwards' linked to energy prices, while past rate hikes are energetically being transmitted to financing conditions'. The labour market is robust, although demand for labour is slowing down. The level of the 'official' cost of credit seems sufficient for them, 'held for a sufficiently long duration', to help bring inflation to target. They will remain firm as long as necessary.

Euroland's stagnation could continue into the fourth quarter of 2023, followed by a 'weak growth phase and then a recovery', Lagarde said. Risks to growth are still tilted to the downside, due to the 'weight' of restrictive monetary policy and geopolitical uncertainties, which could also push up inflation. Prices could also accelerate due to wages that are too fast compared to expectations or profit margins that are too high.

Discussions on rate cuts are 'premature', Lagarde commented, expressing the 'consensus' of the Governing Council. The president has made it clear in recent days that market expectations point to a reduction in the cost of credit being too close. Interest rate futures, before the press conference, were still expressing a 60 per cent probability of a first cut of 25 basis points in April, with a total reduction of 130 basis points at the end of the year. Instead, the ECB indicated that a first decision could be made in the summer. Although decisions will continue to be made 'meeting after meeting' on the basis of incoming data, which will provide a lot of new information in the coming months, Lagarde recalled.

In addition to fiscal policy, great attention will be paid to wage trends, which could support inflation especially - Lagarde explained - in the services sector, whose price dynamics are 'resilient' and are struggling to slow down, even if increases in restributions are currently being absorbed by profit margins. In the first three months of the year, however, 40 per cent of workers are affected by contract renewals.