ECB officials try to fend off expectations on rate cuts

MADRID (Reuters) – The European Central Bank (ECB) will keep interest rates high for an extended period and could even raise them again if necessary, several of its officials said on Friday, pushing back some market expectations according to which euro zone rates will start to fall next spring.

“We have not decided, discussed or even mentioned cuts (in interest rates),” ECB President Christine Lagarde said at a press conference in Santiago de Compostela, in Spain, where an informal meeting of European Union finance ministers is taking place.

The ECB raised its interest rates for the tenth time in a row on Thursday, bringing its deposit rate to 4% while it was still negative 14 months ago, in the face of persistent inflationary pressures.

However, the institution signaled in its press release that the current cycle of monetary tightening, the most aggressive since the creation of the euro zone, was probably coming to an end as the euro zone economy slows.

Christine Lagarde said on Friday that rates will be kept high “long enough” for inflation to return to the ECB’s 2% target and that there was no timetable linked to this process, decisions being taken during the meetings, based on the data received.

The vice-president of the ECB, Luis de Guindos, for his part declared that expectations concerning a rate cut in June 2024 were only market bets and could easily prove incorrect.

“Inflation will continue to fall, whether headline inflation or core inflation. Markets expect this but they can also be wrong; they are based on a series of assumptions , which sometimes does not come true, that we will start lowering rates in June 2024. It’s a bet, it may be right or it may not be,” he declared on the airwaves of the radio Cadena Cope.

“It will depend on a lot of factors, it will depend on the data,” he added.

Citigroup analysts said on Friday that they now expect the ECB to cut rates in June 2024 instead of September 2024.

“We have made it clear that we will remain in restrictive territory as long as necessary to bring inflation down to 2%,” declared Martins Kazaks, the governor of the central bank of Latvia.

Markets now believe there is a small chance the ECB will cut rates as early as April and expect a 25 basis point cut by July.

“The markets must take a position, but (a rate cut in April) is not compatible with our macroeconomic scenario,” warned Martins Kazaks.

(Reporting by Jesús Aguado, French version Claude Chendjou and Diana Mandiá, editing by Blandine Hénault)

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