ECB holds interest rates, as widely expected by markets 

On Thursday, the European Central Bank (ECB) opted to keep interest rates unchanged for a third straight meeting and stuck with wording that suggests cuts may not be implemented anytime soon. 

The bank affirmed that its key rate would remain at 4% — its highest level since the ECB was created — for an extended period. During a press conference following the decision, ECB President Christine Lagarde reiterated the necessity for policymakers to be more assured that inflationary pressures had genuinely subsided before moving towards cutting rates. 

"The consensus around the table was that it was premature to discuss rate cuts," ECB President Christine Lagarde told her regular news conference following the decision, insisting that future decisions would be data-dependent. 

"We need to be further along the disinflation process to be confident that inflation will be at target - sustainably so." 

The euro fell against various currencies in response to the announcement, while the Euro STOXX 50 index, which represents European blue-chip companies, recovered from losses and entered positive territory, rising by 0.4% to 4,582.26. 

At the time of writing on Friday morning, the euro to dollar rate had declined by close to 0.3%, trading around the $1.0819 mark. 

ECB rate cut expectations pushed from spring, may occur later this year 

Prior to the announcement, investors were betting on the ECB to start cutting the key rate as early as April. The prevailing anticipation was for a series of consecutive cuts at each meeting leading up to the end of the year, leaving it at 2.50%-2.75% by December. 

Although interest rate futures still indicated approximately a 60% likelihood of a 25 basis-point ECB rate cut in April, expectations for cuts by year-end increased to around 140 basis points, compared to the 130 basis points prior to the decision. 

In a preview of the ECB decision, Markets.com Chief Market Analyst Neil Wilson said the likelihood of an interest rate cut this spring was becoming less and less likely: 

“Lagarde won’t want to tie herself to a date, though she has indicated a cut may come in the summer. Certainly it appears that the spring is becoming less likely and markets only now price in about a very slim chance of a cut in April, though the market is still confident of around 140bps of cuts over the course of the year. She will want to stress that the ECB is data-dependent, likely facing upside risks to inflation from geopolitics and wages, downside risks to growth outlook. The uptick in inflation in December provides ample cover for the ECB to hold fire and signal that it’s not rushing to a cut at the next meeting”. 

Analysts respond to ECB interest rate decision, say the central bank is eyeing summer for first cuts 

The Reuters news agency rounded up a range of analyst reactions to the ECB decision. 

Colin Finlayson, Fixed Income Investment Manager at Aegon Asset Management in Edinburgh, said waiting until the summer before starting to reduce interest rates may prove to be a costly strategy for the ECB: 

"The ECB kept [its] policy unchanged at 4%, as widely expected. Although Ms Lagarde attempted to push back on the current market expectations of rate cuts in the coming month, she did have to concede that both underlying inflation and inflation expectations have continued to fall. 

With the ECB current growth outlook characterised as having risks to the downside, the market paid little attention to her attempts to dampen rate-cut enthusiasm. The ECB are guiding towards the summer at the earliest for any rate cuts to begin, but we feel that they may not have the luxury of waiting that long."  

The ECB decision was hardly a surprise, according to Madison Faller, Global Investment Strategist at J.P. Morgan Private Bank in London, who said: 

"It's not a surprise that the ECB held rates steady today, especially as speakers have been fairly clear that they need to see more confirmation that inflation is moving sustainably back to its target.”. 

"That jives with the recent push-back against market pricing. The wage data due to be released in June is probably the variable to watch from our end”. 

Some think that the ECB's insistence that even more evidence of disinflation is needed for it to start cutting rates raises the chance of a policy error. TS Lombard's Davide Oneglia wrote: 

"Having overlooked the negative impact of monetary tightening on growth until now, the ECB remains biased towards cutting too little, too late”. 

Euro forecast: Citi HK sees EURUSD at 1.02 in 6-12 month projection 

The ECB’s decision saw the euro dip against a range of currencies.  

In a longer-term view, analysts at Citibank Hong Kong’s Wealth Management division saw the euro creep towards parity with the dollar on a 6-to-12-month horizon, citing the effect of the ECB’s eventual policy pivot: 

“Citi Analysts remain constructive on EURUSD tactically (0-3m forecast of 1.11). EUR has benefited from global equities remaining supported, the ECB pushing back on dovish market pricing, and a potential bottoming in sentiment indicators.  
 
The medium-term backdrop is still fragile, however, and an eventual dovish pivot from the ECB remains EURUSD negative”. 

At the time of writing on Friday, the euro to dollar currency pair traded at $1.082, with the common currency sliding by close to 0.3% against the greenback.  

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