Europe's central bank keeps record-high interest rates, cuts inflation forecasts
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President of the European Central Bank Christine Lagarde. Photo: Frederick Florin/AFP via Getty Images
The European Central Bank (ECB) held interest rates at a record high on Thursday, but released new economic forecasts showing notably cooler inflation that might open the door to lowering rates later this year.
Why it matters: Much like the U.S. Federal Reserve, the ECB is weighing when to cut borrowing costs as the inflation shock recedes. But European policymakers face a complication the Fed does not — a sluggish economy on the brink of a recession.
By the numbers: In a statement, the ECB staff says it now projects inflation to average 2.3% this year before falling to its 2% target in 2025.
- That is a lower forecast for 2024 than the 2.7% projected in December, largely to reflect the slowdown in inflation that looks to be underway.
- Projections for core inflation — which excludes food and energy prices — were also revised down. Now that gauge of inflation is expected to average 2.6% this year and 2.1% in 2025.
- Inflation across the eurozone was 2.6% in February, according to preliminary figures released last week. Core inflation was 3.1%.
The intrigue: The ECB hinted it remains concerned about wage growth that is stoking inflation.
- "Although most measures of underlying inflation have eased further, domestic price pressures remain high, in part owing to strong growth in wages," the central bank said in its statement.
- But in a press conference on Thursday, ECB president Christine Lagarde said there were signs "that growth in wages is starting to moderate."
- "Profits are absorbing part of the rising labor costs, which reduces the inflationary effects," Lagarde added.
The big picture: The sharp interest rate hikes enacted to cool inflation have taken a toll on the euro area's economy.
- "Financing conditions are restrictive and the past interest rate increases continue to weigh on demand, which is helping push down inflation," the ECB said in a statement.
- The central bank projects the economy will grow just 0.6% this year — 0.2 percentage point below its prior forecast. Economic activity is "expected to remain subdued in the near term" before picking up next year, the statement says.
The bottom line: The ECB says it will continue to monitor economic data as it considers when to cut interest rates — a message similar to that from Fed officials.
- In particular, the central bank notes, "interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission."
Editor's note: This story was updated with comments from Lagarde.
