The European Central Bank decided to keep its key interest rate benchmark unchanged, citing the need for confirmation that rapidly declining inflation is firmly under control before considering a rate cut to support the struggling economy. The bank highlighted that while most measures of underlying inflation are easing, domestic price pressures remain strong and are keeping services price inflation high. President Christine Lagarde’s upcoming news conference will be closely monitored for hints about the potential downward path of rates at future meetings. The policy meeting is seen as a prelude to a potential rate cut at the next meeting on June 6.
Central banks in the rich world, including the ECB and the U.S. Federal Reserve, are evaluating the timing for potential rate cuts, which could make credit more affordable for businesses and consumers. Stock market investors have been closely monitoring these policy shifts, with recent market movements reacting to inflation reports that may delay rate cuts. The ECB, along with other central banks, is leaning towards reversing some of the rate hikes that were implemented to control inflation. While the Swiss National Bank has already cut rates, Japan recently raised rates for the first time in 17 years.
The decision to maintain the current interest rate comes as the eurozone economy continues to struggle, with growth remaining weak and uncertainties surrounding the prospect of a rate cut from the U.S. Federal Reserve. The U.S. economy has shown signs of strong growth, with robust jobs figures and inflation reaching 3.5% in March. Analysts speculate that the Fed’s planned rate cuts may be fewer or delayed from the original schedule. Rate cuts are often seen as beneficial for stocks, as they signal a strong economy ahead that can boost corporate profits.
While the European energy shock has subsided, U.S. demand for goods remains high, impacting inflation trends in both regions. In Europe, the inflation decline is considered more predictable compared to the U.S., where excess demand has been a driving force behind inflation. The spike in energy prices in Europe, caused by the disruption in natural gas supplies due to the conflict in Ukraine, has added pressure to the economy. However, with energy prices returning to pre-war levels and supply chain disruptions easing, the focus now shifts to wage increases and services inflation. The ECB is awaiting more data to assess the situation accurately before making any further decisions.
