ECB not changing interest rates but first cut could be on the horizon for next meeting – Executive Summary

The European Central Bank (ECB), for the fifth time since July 2022, did not increase its benchmark interest rates for the euro area at its monetary policy meeting.

Therefore, the executive authority led by Christine Lagarde decided to maintain the interest rate on the main refinancing operations and the interest rates on the permanent liquidity facility and the permanent deposit facility to remain unchanged at 4.50%, 4.75% and 4.00%, respectively.

We kept interest rates unchanged at our last meeting.

Review our monetary policy decisions https://t.co/nLLQk6w1bL pic.twitter.com/rZ8Wex669f

— European Central Bank (@ecb) April 11, 2024

“Today the Governing Council decided to leave the ECB's three key interest rates unchanged. The available information confirmed, in general, the Governing Council's previous assessment regarding the medium-term inflation outlook.

Ricardo Evangelista, CEO of ActivTrades Europe, explains to Executive Digest that the minutes of the March meeting, published last week, show that for the ECB, inflation has developed positively, approaching the 2% target.

“However, the minutes also indicate that although the conditions necessary to make the first cut are approaching, it is still advisable to wait for more data that reinforces this view to emerge.”

Almost All analyst Vitor Madeira ended up higher than expected for March, and employment levels continued to stabilize with the unemployment rate rising to 6.5%, giving a stable and slightly better economic outlook than at the previous meeting.

“The Governing Council is determined to ensure that inflation returns to its medium-term target of 2% in due course. It is of the view that the ECB’s key interest rates are at levels that contribute significantly to the ongoing inflation deceleration process. “Future decisions of the Governing Council will ensure that Key interest rates remain sufficiently restrained as long as necessary,” adds the Lagarde-led executive.

Asset Purchase Program (APP) and Pandemic Emergency Purchase Program (PEPP)

The ECB explains that the APP portfolio is decreasing at a measured and predictable pace, as the European system no longer reinvests principal payments in maturing bonds. The Board of Directors acknowledges that it intends to continue to reinvest, in full, the principal payments of outstanding securities acquired under the PEPP program during the first half of 2024. Over the second half of the year, it intends to reduce the PEPP portfolio by EUR 7.5 billion per month. in the middle. The Board of Directors intends to discontinue reinvestment under the Emergency Purchase Program at the end of 2024.

Refinancing operations

With regard to refinancing operations, as banks repay the amounts borrowed under the targeted long-term refinancing operations, the Board of Governors will regularly evaluate how the targeted lending operations and their continued repayment contribute to guiding its monetary policy.

When is the first drop due?

Vitor Madeira, analyst at XTB, highlights that, unlike in the US, if macroeconomic data continues in the same direction as seen in the past three months, “it could make sense to start the first cut in June 2024.”

Then, taking into account the development of indicators, “it is possible to make two additional reductions by the end of the year.” However, he warns that “the fact that oil prices have risen by more than 20% in the past three months could complicate the process of reducing inflation in the near future, and this may impose constraints on the calculations of the European Central Bank, which must pay attention to the development of the economy.” . Prices in the coming years and months.

ActivTrades Europe CEO Ricardo Evangelista also shares the same vision, and expects “the first cut will take place at the next meeting of the Monetary Policy Board, which will be in June.”

“Market expectations are very high, with a 98% chance of a 25 basis point cut in June. However, if the ECB’s comments disappoint investors, tensions could emerge in interest rate markets in an environment of increasing uncertainty about the timing of the first cut.” For the Fed's interest rate, with a 72% probability of a first cut in June.Global Director of Bond Investments, Allianz Global Investors.