Euro Extends Decline After ECB Holds Rates At Highs, Hints At Cuts To Come

After yesterday's US CPI print - and the dramatic adjustment to market expectations of Fed policy action (timing and extent) - this morning's ECB was expected to be a nothing-burger with all eyes out for any confirmation that June is 'go-time' for Lagarde to cut (albeit a rare occurrence without a concomitant Fed cut) - which she will likely push her to stress the ECB's independence from The Fed.

Indeed, as expected, The ECB held rates at record highs for a fifth straight meeting.

The ECB added a new opening line to the statement:

“The Governing Council’s future decisions will ensure that its policy rates will stay sufficiently restrictive for as long as necessary..."

And it appears The ECB is laying the groundwork for a rate-cut sooner than later...

“If the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction.”

One notable change in the statement, from this...

“The Governing Council’s future decisions will ensure that policy rates will be set at sufficiently restrictive levels for as long as necessary.”

...to this...

“The Governing Council’s future decisions will ensure that its policy rates will stay sufficiently restrictive for as long as necessary.”

Suggesting something is about to change.

Finally, The ECB reports that most measures of underlying inflation are easing.

Wage growth is moderating and firms are absorbing parts of these costs in their profits.

But, it says, domestic price pressures continue to be strong.

In short, the ECB remains data-dependent and isn’t committing to anything but if the progress of inflation and other factors has progressed sufficiently by June’s forecasts than reducing the level of policy restriction “would be appropriate”.

Not much movement in the bond space but the euro extended losses modestly on the ECB news...

Source: Bloomberg

As The FT notes, some eurozone policymakers, as in the UK, may want to avoid cutting rates much more aggressively than their counterparts in the US, partly out of fear of weakening their currencies and so further stoking inflation. But Peter Schaffrik, a strategist at RBC Capital Markets, said:

“The ECB has nailed its colours to the mast and shifting the guidance at this stage when actual inflation numbers are currently not far away from their own forecasts seems difficult to imagine.”

Now, we wait to see what Christine Lagarde says in the presser. You can bet someone a warm beer that she raises the fact that the ECB is independent of The Fed (when everyone knows, she is ultimately beholden to what Powell says and does)...

Read the full statement below:

The Governing Council today decided to keep the three key ECB interest rates unchanged. The incoming information has broadly confirmed the Governing Council’s previous assessment of the medium-term inflation outlook. Inflation has continued to fall, led by lower food and goods price inflation. Most measures of underlying inflation are easing, wage growth is gradually moderating, and firms are absorbing part of the rise in labour costs in their profits. Financing conditions remain restrictive and the past interest rate increases continue to weigh on demand, which is helping to push down inflation. But domestic price pressures are strong and are keeping services price inflation high.

The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. It considers that the key ECB interest rates are at levels that are making a substantial contribution to the ongoing disinflation process. The Governing Council’s future decisions will ensure that its policy rates will stay sufficiently restrictive for as long as necessary. If the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction. In any event, the Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction, and it is not pre-committing to a particular rate path.

Key ECB interest rates
The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 4.50%, 4.75% and 4.00% respectively.

Asset purchase programme (APP) and pandemic emergency purchase programme (PEPP)
The APP portfolio is declining at a measured and predictable pace, as the Eurosystem no longer reinvests the principal payments from maturing securities.

The Governing Council intends to continue to reinvest, in full, the principal payments from maturing securities purchased under the PEPP during the first half of 2024. Over the second half of the year, it intends to reduce the PEPP portfolio by €7.5 billion per month on average. The Governing Council intends to discontinue reinvestments under the PEPP at the end of 2024.

The Governing Council will continue applying flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to countering risks to the monetary policy transmission mechanism related to the pandemic.

Refinancing operations
As banks are repaying the amounts borrowed under the targeted longer-term refinancing operations, the Governing Council will regularly assess how targeted lending operations and their ongoing repayment are contributing to its monetary policy stance.

***

The Governing Council stands ready to adjust all of its instruments within its mandate to ensure that inflation returns to its 2% target over the medium term and to preserve the smooth functioning of monetary policy transmission. Moreover, the Transmission Protection Instrument is available to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across all euro area countries, thus allowing the Governing Council to more effectively deliver on its price stability mandate.

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:45 CET today.