There was no surprise from the European Central Bank as it kept its deposit rate unchanged at 4.0% for a fourth straight time. The ECB revised lower its inflation and growth projections for 2024, as expected. ECB President Christine Lagarde is holding a press conference at the time of writing and we could see some stronger movement from the Euro in response to her comments.
The ECB statement noted that inflation had declined since the last meeting in January and the ECB has revised down its inflation projection. For 2024, the central bank currently expects the headline Consumer Price Index (CPI) to ease to 2.3% and core CPI, which excludes food and energy is projected to fall to 2.6%. At the same time, the statement noted that the ECB remains concerned about high inflation, in part due to strong growth in wages. The ECB also revised lower its growth forecast to 0.6% for 2024.
The ECB has been reluctant to lower rates due to concerns that the battle against inflation is not over and if it lets down its guard in the form of lower rates, inflation could rebound higher. CPI has fallen to 2.6% year-on-year in the eurozone, but core CPI is at 3.1% and service inflation is running around 4%, which means that the ECB still has its work cut out before it reaches its inflation target of 2%.
Higher interest rates have pushed down inflation but could also tip the weak eurozone economy into a recession. The ECB thus faces a dilemma over its interest rate path and has decided to pause and not lower rates until it sees strong evidence that inflation will continue on a downward path. ECB President Lagarde warned in January that rate hikes remained on the table, but this seems very unlikely as inflation has been falling and the economy remains weak.
In the aftermath of the ECB rate decision, the Euro has shown a limited response. The euro dipped lower against the United States Dollar and the British Pound immediately after the rate decision but has since recovered most of those losses. In the European session, EUR/USD is trading at 1.0897, down 0.01% and EUR/GBP is at 0.8545, down 0.17%.
Stock market reaction has been positive, with the German DAX at 17,796.15, up 72.50 points (0.42%).
The French CAC 40 Index is at 8,010, up 55.33 points (0.70%).