ECB Set to Announce a Pause in Rate Cuts
The European Central Bank (ECB) has lowered interest rates by 150 basis points since June 2024.
In less than a year, the central bank has reduced the cost of borrowing, bringing the deposit rate—where banks park their excess liquidity—from 4% to the current 2.5%.
These rate cuts have had a clear impact on financial markets: deposit and checking account yields have declined, encouraging consumption while discouraging saving, and credit, including mortgages, has become cheaper, further stimulating spending and investment.
Now, a sharp increase in public spending is expected across the eurozone to fund an ambitious military buildup and improve infrastructure. This shift comes at a time when inflation remains stubbornly above target, refusing to settle at a sustained 2%. Inflation data suggests that the Consumer Price Index (CPI) has plateaued slightly above the ECB’s goal. Given this backdrop, it is unsurprising that a growing number of policymakers within the ECB—the so-called “hawks”—are advocating for a pause in rate cuts. This pause could be formally announced or at least strongly signaled in April, either following one last rate cut or as an immediate policy shift.
For now, markets still anticipate two more rate cuts this year, including one in April. However, momentum is gradually shifting in favor of the hawks, who support a more restrictive monetary policy, at the expense of the “doves,” who favor a more accommodative stance.
Lagarde’s Ambiguous Response
During the post-meeting press conference, ECB President Christine Lagarde had to deploy all her rhetorical skill to explain that something significant had changed—without explicitly declaring an end to rate cuts… or perhaps implying exactly that.
When asked whether the changes in the ECB’s statement signaled a pause in rate cuts for April, Lagarde responded:
“In your first question, you rightly pointed out that we have adjusted the wording of the fourth paragraph of our monetary policy statement—it now states that rates are significantly less restrictive. Let me explain what that means because this is not a minor or trivial change; it carries weight. Previously, we stated that we would maintain restrictive monetary policy for as long as necessary, which was largely a static assessment of what was required. Now, by saying that ‘our monetary policy is becoming significantly less restrictive,’ we are adopting a more dynamic approach. In other words, we are acknowledging the path we have taken—150 basis points in cuts since we began easing—and recognizing that, as a result, policy is becoming significantly less restrictive.”
Her response, while carefully worded, leaves room for interpretation, reinforcing speculation about an imminent pause in the ECB’s rate-cutting cycle.
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