ECB stands pat, but says June projections may justify cuts

Rate-setters in Frankfurt stood pat on rates on Thursday, but said that it would be correct to lower interest rates if its next set of projections, in June, increased their confidence that inflation was headed lower.

The policy statement also stated that the European Central Bank's Governing Council would take decisions on a meeting by meeting basis and that rates were not a pre-set path.

For her part, ECB boss Christine Lagarde dedicated a substantial part of her introductory remarks to the possible impact on growth and prices of geopolitical events, whether in Ukraine or the Middle East.

Lagarde also conceded that variations in energy prices were important and that inflation in the euro area while expected to decline would not do so in a straight line.

Furthermore, "a few" GC members had been ready to cut rates on Thursday, she added.

Also in the statement, the GC said that the latest information available "broadly" confirmed its prior medium-term inflation outlook.

Most gauges of underlying inflation were "easing" and wage increases "gradually moderating", it added.

As well, companies were absorbing part of the higher labour costs via their profits.

Yet domestic inflation was "strong" and was keeping services price inflation "high".

The ECB kept its interest rate on the main refinancing operations, the marginal lending facility and the deposit facility at 4.50%, 4.75% and 4.00%, respectively, all as expected.

For Holger Schmieding at Berenberg a June rate cut by the ECB was nearly a "foregone" conclusion.

On whether the ECB should or could deviate from the Fed's lead, the economist said that it was unusual for it to take the lead but that the euro area's "current economic performance more than justifies that".

"The Eurozone is a big economy for which the exchange rate plays only a modest role. Unless the US dollar were to surge significantly from current levels, the Fed outlook of higher for longer should not affect ECB policy much," he said in a research note sent to clients.

"In the Eurozone, fiscal policy is only mildly expansionary. There is no need to offset that with maintaining the current degree of monetary restriction."

Also on Thursday, Schmieding pushed back his forecast for a first rate cut by the Fed from June to December of 2024.