At its monetary policy meeting in Frankfurt on Thursday 11 April, the Governing Council of the European Central Bank (ECB) decided to keep the ECB’s three key interest rates unchanged. The interest rate on the main refinancing operations therefore remains at 4.50%, the marginal lending facility rate at 4.75%, and the deposit facility rate at 4.00%, its highest level since the creation of the euro.
Macroeconomic data for the euro area
For the euro area, ECB President Christine Lagarde stressed that economic activity had remained weak in the first quarter of 2024 and that the risks to economic growth remained tilted to the downside.
Headline inflation continued to fall (see EUROPE 13383/21).
Christine Lagarde stated that inflation rates are expected to fluctuate around current levels in the coming months, linked in particular to energy prices and associated in particular with the low cost of energy observed over the course of 2023. A decline to reach the ECB target is still expected in 2025.
In addition, most core inflation indicators fell again in February.
The ECB President pointed out that domestic inflation remained high, as did inflation for services, which stood at 4.0% in March.
However, wages and units profits rose in the last quarter of 2023, albeit less strongly than expected.
Unit labour costs remain high, in part reflecting weak productivity growth, highlighted the President. Wage growth is gradually slowing, she said, and companies are absorbing part of the rise in labour costs in their profits.
Ms Lagarde pointed out that the latest bank lending survey – which showed a slight increase in the volume of loans to households and businesses and a slight fall in interest rates – indicated that the financial sector was expecting financing costs to fall.
A rate cut review in June?
Following on from Christine Lagarde’s statements at the end of the March monetary policy meeting (see EUROPE 13376/22) and to ECB observers (see EUROPE 13366/11), a review of the possibility of a cut in key rates still looks likely for June.
The possibility of a reduction is explicitly mentioned in the text of the decisions: "If our [Governing Council’s] updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission [the three criteria of the ECB's reaction function, which are important in the new decision-making approach, editor’s note] were to further increase our confidence that inflation is converging to our target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction”.
However, Ms Lagarde stressed that the Governing Council was not committing to any particular interest rate path in advance, but said that “the direction is rather clear”.
The ECB President said that a small number of governors were already confident of a return to price stability and that they were ready to decide on a rate cut at today’s meeting, but that they had sided with the large majority of governors, who wanted to wait until June, when data would be available, including a new Eurosystem projection.
The approach to determining the degree and duration of restrictive orientation will be defined “meeting by meeting” and based on all available data.
Wages, in particular, will be closely scrutinised, as they are an important component of service prices, as will profits, to ensure that companies absorb some of the increase in wages and profits. The same will apply to productivity and the services sector.
“We are not going to wait until everything goes back to 2% to make the decisions that will be necessary”, stressed Mrs Lagarde, adding that inflation in certain segments will probably be higher. The Governing Council would like to see greater confidence, based on the data, in a sustainable return to 2% inflation over the medium term.
Economic governance
The ECB President said that the Executive Vice-President of the European Commission, Valdis Dombrovskis, had attended the meeting and that the Governors had been pleased to learn that the revised economic governance framework would be put to the vote before the end of the current parliamentary term.
Ms Lagarde also acknowledged that the excessive deficit procedure is one of the four components assessed to determine eligibility for the Transmission Protection Instrument (TPI) (see EUROPE 12998/13), but declined to comment further on the TPI document.
Link to the decisions and statement: https://aeur.eu/f/bq3 (Original version in French by Émilie Vanderhulst)