European Central Bank gives strong signal that cuts are on the way despite Fed uncertainty

The European Central Bank held interest rates at the same level for a fifth consecutive meeting on Thursday, and sent its most clear signal to date of a rate cut in the near future despite uncertainty about what U.S. Federal Reserve will do next.

If the Governing council’s updated assessment on the inflation outlook and the dynamics of underlying prices, as well as the strength of monetary transmission, were to further increase their confidence that the inflation is converging towards the target in a sustainable manner, then it would be appropriate for them to reduce the level of monetary restriction they have at the moment.

In a press briefing following the announcement, ECB president Christine Lagarde stated that this “important” sentence was a loud and clear indication of the current sentiment at the bank.

In its previous communiqués, the ECB did not make any direct mention of loosening monetary policies.


In September, the central banks of the 20 countries who share the euro currency raised their key rate to an all-time high of 4%. This rate has remained unchanged since then.

After the ECB lowered its medium-term forecast for inflation, policymakers and economists are focusing on June as a possible month to reduce rates. Since March, the price rises in euro zone have cooled down more than expected.

The first full data set on wage negotiations for the first quarter will be available to policymakers in June. This is an area that has been a source of concern due to potential inflationary effects.

The ECB said that the information received on Thursday “broadly confirms” its medium-term forecast, which includes a decline in inflation due to lower prices of food and goods.

According to LSEG, market pricing indicates a 25 basis-point reduction in June.

The ECB had been committing to a cut in June for some time. It is very unlikely that this will not be achieved. There are many possible outcomes for the months to come, depending on how far we can get with disinflation. In a recent note, Hussain Mehdi said that the data has been moving in favour of the doves.

Next Fed Steps

The fact that inflation was higher than expected on Wednesday has significantly reduced expectations in the U.S. for a rate cut this summer by the Federal Reserve.

It is unclear how the European Central Bank will react to this development in the largest economy of all time.

Lagarde responded to a question on Thursday regarding whether the U.S. Consumer Price Index figures would affect the ECB rate-cut trajectory. She said, “Of course, everything that happens is important for us, and it will be incorporated in due time in the projection which will be prepared and published in June.” The United States has a large economy, a huge market and a significant financial sector.

Lagarde stated that “we do not assume that what happens in Europe will mirror what happens in America”, stressing the fact that economies, political systems and fiscal policies are all different.

She did not specify if the exchange rate of the euro against the U.S. Dollar would be a factor in policymaking.

In comments made by Reuters, which preceded the ECB decision, Sweden’s deputy governor Per Jansson said on Thursday that if Fed rule out rate cuts in 2020, this could pose a problem for the Riksbank as well as the ECB.

Jansson, in a recent speech, said that the Riksbank’s inflationary pressures would be caused by the weakening Swedish Krona.

Andrew Benito is the chief European economist of Eisler Capital. He told CNBC’s Silvia Amaro that the Fed policy and U.S. inflation data could have a greater impact on the pace and magnitude of any further rate cuts in this year.