The ECB kept its benchmark interest rates on hold in March, noting a further decline in inflation. Price pressures are now expected to reach the 2% target by 2025.
ADVERTISEMENTThe European Central Bank (ECB) maintained its benchmark interest rates during its March meeting, as widely predicted by market observers. The ECB emphasized that inflation has declined further, while reiterating its commitment to restoring price pressures to the medium-term target of 2%.
In its latest decision, the ECB kept the main refinancing rate at 4.5%, which stands at its highest level in 22 years. The marginal lending rate was also held steady at 4.75%, marking its highest point in 24 years, while the deposit facility rate remained at a record high of 4%.
Latest ECB outlook shows falling inflation and growth
The latest staff projections indicate that inflation is expected to average 2.3% in 2024, followed by 2.0% in 2025 and 1.9% in 2026. Additionally, projections for inflation, excluding energy and food, have been adjusted downward, averaging 2.6% for 2024, 2.1% for 2025, and 2.0% for 2026.
The staff has adjusted their growth projection for 2024 downward to 0.6%, anticipating continued subdued economic activity in the near future. However, they expect the economy to rebound thereafter, with projected growth rates of 1.5% in 2025 and 1.6% in 2026.
The ECB stated that despite the easing of most measures of underlying inflation, persistent domestic price pressures persist, partly due to robust wage growth.
Frankfurt's reiterates data-dependent approach
The ECB's forward guidance underscores its intention to assess economic data in determining the appropriate level and duration of its policies going forward.
The statement emphasises the data-dependent approach of the Governing Council in assessing inflation dynamics and economic conditions to determine the appropriate course of monetary policy.
Latest preliminary data from Eurostat indicates that the inflation rate for the euro area dipped to 2.6% year-on-year in February 2024, lower than the previous month's 2.8%, but still slightly above market expectations of 2.5%.
There were no changes announced regarding the Asset Purchase Programme (APP) or the Pandemic Emergency Purchase Programme (PEPP). The APP portfolio is being reduced in a methodical and predictable manner, as the Eurosystem ceases reinvestments from maturing securities.
Regarding the PEPP, the ECB will reduce the PEPP portfolio by an average of €7.5 billion per month beginning in the latter half of 2024, and cease reinvestments under the PEPP by the close of 2024.
Market reactions
Futures on short-term interest rates suggest that the market anticipates a full percentage point of rate cuts by the ECB, with the first expected to be implemented by June.
Following the release of the ECB's latest staff projections, initial market reactions witnessed a weakening of the euro against the dollar, with the EUR/USD pair easing to 1.0880.
Yields on sovereign bonds across the euro area experienced a general decline. German Bund yields, in particular, dropped by 6 basis points to 2.28%, marking their lowest level in a month. Meanwhile, the 10-year Italian BTP yield also decreased by 7 basis points to 3.58%, reaching its lowest level since late December 2023.
European equity indices rallied strongly, fueled by increased expectations of rate cuts following the new ECB staff projections.
The Euro Stoxx 50 surged to 4,950 points, reaching its highest level since November 2000. Spanish equities notably performed well, with the IBEX 35 index rising by 1.1% over the day.
Similarly, the French CAC 40 Index recorded a modest gain of 0.5% by 14:25 CET, nearing fresh all-time highs at nearly 8,000 points.
Investors are now eagerly awaiting remarks from ECB President Lagarde, scheduled to begin at 14:45 CET.
