European Central Bank holds interest rates at 4%

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The European Central Bank held interest rates at all-time highs on Thursday but signalled it was considering a cut at its next meeting in June.

The ECB said after its governing council met in Frankfurt that its benchmark deposit rate would stay at 4 per cent until rate-setters were sure price pressures had stabilised.

In a shift from previous language, the ECB said it “would be appropriate” to cut rates if underlying price pressures, its updated forecasts and the impact of previous rate rises increased its confidence that inflation was closing in on its 2 per cent target “in a sustained manner”.

Eurozone inflation has fallen from a 2022 peak of 10.6 per cent to 2.4 per cent in March — tantalisingly close to the bank’s target.

The euro nudged lower, down 0.2 per cent against the dollar on the day at $1.0721 after the ECB decision. 

However, traders in swaps markets downgraded the likelihood that the central bank will begin cutting rates in June, to 67 per cent, from 75 per cent earlier the day.

Interest rate-sensitive two-year German Bund yields — a benchmark for the eurozone — held steady at 2.98 per cent, up 0.02 percentage points on the day.

Markets’ rate cut expectations have been shaken by data this week showing US inflation rose more than expected in March.

Investors have responded by slashing their bets on Federal Reserve rate cuts, to which they now ascribe only a 50 per cent likelihood before September.

The market moves in the US have also led traders to scale back their expectations of how many rate cuts the ECB and Bank of England will make over the course of the year.

Some eurozone policymakers, as in the UK, may want to avoid cutting rates much more aggressively than their counterparts in the US, partly out of fear of weakening their currencies and so further stoking inflation.

But Peter Schaffrik, a strategist at RBC Capital Markets, said: “The ECB has nailed its colours to the mast and shifting the guidance at this stage when actual inflation numbers are currently not far away from their own forecasts seems difficult to imagine.”