by Balazs Koranyi and Francesco Canepa
FRANKFURT (Reuters) – The European Central Bank (ECB) is likely to leave interest rates unchanged at a record level on Thursday, but also signal that a cut could be made as early as June, given the net slowing inflation and prolonged economic weakness.
After multiplying increases in borrowing costs to deal with the surge in inflation, the ECB took a pause last September, when rates have been stable since.
It has also reported, since then, that rate cuts were being considered, its officials waiting to have more reassuring data to make a shift in the institution’s monetary policy.
Another element could, however, weigh in the balance and affect the ECB’s decisions: the possible postponement of the first rate cut expected from the Federal Reserve (Fed). Better than expected inflation data in the United States could push the American central bank not to cut rates in June, as expected.
This scenario could encourage the ECB to take its time, but probably not to refrain from any rate cuts, given the growing gap between the economic situation in the United States and that of the euro zone.
The euro zone economy has now stagnated for six consecutive quarters, with a labor market starting to soften. The American economy continues to beat expectations, its job market remains tight and inflation increased more than expected in March.
In a note, Deutsche Bank said a June rate cut would look like a “compromise” between ECB officials favoring easing and those advocating a more conservative stance.
“The ‘hawks’ accept that the inflation outlook has improved but they do not want to rush to ease rates as early as April. The ‘doves’ seem satisfied that the hawks are not opposed to declines and happy to wait until June for a more solid consensus on a decline,” the bank wrote.
The scenario of a rate cut in June has been raised so often that investors see it as a form of promise, with the risk that otherwise the ECB’s credibility would be damaged.
Christine Lagarde, the president of the institution, should refrain from discussing any direction of monetary policy beyond June, especially in the total absence of a consensus on the extent and timing of the cuts. rate to operate.
Markets are currently pricing in a total decline of 80 basis points this year, with three or four declines, but expectations have continued to fluctuate.
(Balazs Koranyi; French version Jean Terzian)
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