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ECB Holds Steady, Yet Lagarde Signals Potential Shift in Rate Policy by Summer

The ECB maintained its policy rate at 4.5%, a move widely anticipated by observers. In her press conference, President Christine Lagarde subtly suggested that the European Central Bank might initiate interest rate reductions around mid-2024.

While this merely echoed her previous statements made in Davos regarding potential borrowing cost reductions, traders escalated their forecasts, assigning a 90% likelihood of a rate cut in April and anticipating a total easing of 141 basis points over the year, up from the earlier estimate of 130 basis points.

It appears that the ECB is growing increasingly concerned about the economic prospects of the Euro Area, especially at a time when the inflation outlook has notably improved. Consequently, despite its primary focus on inflation, the ECB may consider discussing rate cuts sooner if economic activity fails to revive and remains lackluster, particularly now that real policy rates have turned positive.

Our Take: Much like other major central banks in developed markets, the ECB is encouraged by the progress made on curbing inflation and is now poised to respond more keenly to economic data. Given the sluggish growth in Europe, should the economic momentum fail to accelerate in the coming months, the ECB might lead the way in initiating the rate-cutting cycle among developed market central banks.


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