Europe’s energy crisis sparked by Russia’s war in Ukraine has eased. Inflation is way down from its painful double-digit peak. But there likely won’t be an interest rate cut at the European Central Bank’s meeting Thursday, even as higher borrowing costs weigh on the stalled economy.
And the wait could be longer than many originally expected.
ECB President Christine Lagarde is likely to emphasize that the bank wants to see conclusive evidence that inflation figures will keep gliding down toward the bank’s goal of 2%.
That is the read from analysts who follow the bank, and financial markets seem to be falling into line. While they had previously priced in a chance for a rate cut as early as April, those bets have faded and markets now are factoring in a quarter-point cut in June.
A similar situation is shaping up in the U.S., where Federal Reserve Chair Jerome Powell told Congress on Wednesday that the central bank needs more confidence inflation is under control before cutting rates. Fed officials have signaled three rate cuts this year, but Powell has given no indication when they might start.
In Europe, inflation was down to 2.6% in February, well below its peak of 10.6% in October 2022. But the consumer price index has been stuck between 2% and 3% for five months, raising concern that the last mile toward the ECB’s goal may be slower than hoped.
While the spikes in food and energy prices that helped drive the outbreak of inflation have eased, inflation has spread to services, a broad sector of the economy that includes everything from movie tickets and office cleaning to tuition and medical care.
Meanwhile, wages rose as workers started bargaining for higher pay to make up for lost purchasing power as inflation ballooned.
Prices for natural gas — which is used to power factories, heat homes and generate electricty — have fallen to around 24 euros ($26) per megawatt hour, not much higher than levels seen before Russia started threatening Ukraine.
And oil prices have been flat as Saudi Arabia and other members of the OPEC+ coalition of oil producers maintain cuts to output that have only put a floor under prices.
“Given that most officials seem to be coalescing around a start to the easing cycle in June, the (ECB) governing council is likely content with current market pricing,” wrote analysts at ABN AMRO Financial Markets Research. “Therefore, the aim of communication following the end of the meeting will likely try to not rock the boat one way or the other.”
Lagarde’s message will likely be that “the central bank wants to see more evidence that domestic inflationary pressures are abating,” the analysts said in a note.
The ECB has raised its key rate from minus 0.5% to a record-high 4% in just over a year, starting in July 2022. Higher interest rates dampen inflation by making it more expensive to borrow and buy things on credit, reducing demand for goods. But high rates can weigh on economic growth, too.
Pressure for a rate cut is coming as the economy has stalled. The 20 countries that use the euro currency saw no growth in the fourth quarter of last year after shrinking 0.1% in the previous quarter. Germany, Europe’s largest economy, expects to grow just 0.2% this year.
Complicating matters is the fact that it’s not a classic downturn because unemployment remains low. Markets will watch closely for signals on when the first rate cut will come.
With recent economic data, “the pressure on the ECB to cut rates earlier has gone up,” Carsten Brzeski, chief of global macro at ING bank, wrote in an analyst note. “We still think that the ECB has good reasons to resist that pressure and to push back expectations.”
Lagarde’s comments at her post-meeting news conference will likely be “sending more precise signals for a June rate cut,” he said.