LONDON (Reuters) -The European Central Bank left interest rates unchanged as expected on Thursday but acknowledged that inflation is easing faster than it previously expected, potentially opening the way for rate cuts later this year.
The ECB has held borrowing costs at record highs since September and has so far batted back any call for a rate cut, even if policymakers are now openly acknowledging that such a move is coming and only the timing is up for debate.
MARKET REACTION:
FOREX: The euro slipped against the dollar and was last down 0.25% at $1.0870. It stood at $1.0894 just before the ECB statement. The euro fell 0.4% against sterling to 85.31 pence.
BONDS: Germany’s rate-sensitive two-year bond yield fell 10 basis points (bps) on the day to 2.77 %, having traded flat at around 2.84% earlier
Money markets rate cut bets edged up with traders pricing in around 100 bps worth of easing by year end, versus 90 bps earlier in the day.
STOCKS: European shares rose 1% and banking stocks were down 0.35% . The STOXX 600 index was up 0.4% ahead of the decision. European real estate stocks, which rose after the decision, were last up 2.7% on day.
COMMENTS:
SYLVAIN BROYER, CHIEF EMEA ECONOMIST,S&P GLOBAL RATINGS, FRANKFURT:
“Since the ECB has been setting interest rates for the euro zone, it has lowered them 21 times, and never when core inflation was above 2.2%.
“Today, core inflation stands at 3.1% and will not fall below 2.2% before the summer. Barring an accident affecting growth or financial stability, a cut in ECB rates in June is therefore the most likely scenario.”
ANDREW KENNINGHAM, CHIEF EUROPE ECONOMIST, CAPITAL ECONOMICS, LONDON:
“There was only a small change to the press release compared to January. Rather than saying “the declining trend in underlying inflation has continued”, today’s statement says “although most measures of underlying inflation have eased further, domestic price pressures remain high, in part owing to strong growth in wages.”
“Arguably that is slightly hawkish, but not enough to shift the dial on rate expectations. The line that “ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution” to bringing inflation to target is unchanged.”
MARCHEL ALEXANDROVICH, EUROPEAN ECONOMIST, SALTMARSH ECONOMICS, LONDON:
“My impression is that there isn’t a meaningful pivot in this statement.”
“There have been some downward revisions to inflation but the scale of the revision doesn’t raise the chances of an imminent move.”
ALTAF KASSAM, EMEA HEAD OF INVESTMENT STRATEGY AND RESEARCH, STATE STREET GLOBAL ADVISORS, LONDON:
“This hawkish pause was all but ‘nailed on’, as it was extremely unlikely that the ECB would move before the Fed. With the chances of a Fed cut now almost completely priced out for May, we see the odds for an ECB cut in April to have shrunk close to zero as well, hence our call for a June start to the easing.”
“The message seems to be that the Bank (ECB) needed to wait for more evidence that inflation was sustainably coming down to their 2% target before considering easing. That said, with the official inflation forecasts lowered as well, we do see a clearer path to June’s easing.”
(Reporting by Markets Team; Compiled by Dhara Ranasinghe; editing by Yoruk Bahceli)
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