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ECB Signals Rate Cuts Amid Inflation Concerns

ECB to Lower Rates in June Amid Declining Inflation, Not Returning to Ultra-Low Levels: Villeroy de Galhau Indicates

By Athena Xu

4/13, 15:22 EDT

Key Takeaway

  • ECB plans to cut interest rates in June, with further reductions expected by year's end, moving away from 2015-2022's low/negative levels.
  • Decision follows record-high deposit rate of 4%, contingent on meeting a 2% consumer-price growth target; inflation cooled to 2.6% in February.
  • Fiscal challenges in France and potential policy divergence with the Federal Reserve highlight global economic implications.

ECB Signals Rate Cuts

The European Central Bank (ECB) is poised to lower interest rates in June, a move anticipated by Governing Council member Francois Villeroy de Galhau. In a recent interview with Le Journal du Dimanche, Villeroy de Galhau expressed confidence in the declining inflation trajectory, suggesting that the initial rate cut in early June is likely to be succeeded by further reductions by the year's end. However, he clarified that rates would not return to the ultra-low or negative levels seen between 2015 and 2022. This stance was echoed by ECB President Christine Lagarde, who, in a speech in Frankfurt, highlighted the bank's readiness to adjust policy based on upcoming economic projections and inflation paths.

Inflation and Economic Forecasts

The ECB's decision comes after maintaining the deposit rate at a record high of 4% for five consecutive meetings. The potential for rate cuts was first hinted at in the bank's statement, contingent on economic forecasts aligning with a consumer-price growth target of 2%. Lagarde pointed to the June meeting as a critical juncture, with new data on wage negotiations and underlying inflation expected to guide future policy decisions. Despite the uncertain rate path beyond June, Lagarde's outlook on inflation was optimistic, citing a cooling to 2.6% in February, with projections showing a gradual decline to the bank's target over the next few years.

Fiscal Challenges and Global Context

The discussion on interest rates is set against a backdrop of fiscal challenges, particularly in France, where worsening public finances have been reported. The French government's acknowledgment of a wider deficit than anticipated adds pressure to the broader eurozone economic landscape. The ECB's policy moves also occur in a global context, with comparisons drawn to the Federal Reserve's approach to inflation and economic growth. The potential divergence in policy between the ECB and the Fed raises questions about currency market impacts and the relative pricing between Europe and the US.

Street Views

  • Francois Villeroy de Galhau, Governing Council member of the European Central Bank (Neutral on interest rates):

    "Bar a surprise, we should decide on the first cut at our next meeting on June 6... Our cut early June will have to be followed by other cuts by year-end."