Following the April meeting, the European Central Bank expectedly kept rates

Following the April meeting, the European Central Bank expectedly maintained rates. The head of the bank, Christine Lagarde, indicated that if the downward trend in inflation continues, the regulator is ready to soften policy – perhaps this will happen as early as June. Business activity in the euro area, especially in industry, remains weak despite lower gas prices, but its recovery should be supported by rising real incomes as well as the easing pressure of tighter monetary policy on demand.

Following the April meeting, the Governing Council of the European Central Bank (ECB) kept all three key interest rates unchanged: the base rate (4.5% per annum), deposit rates (4%) and short-term ECB lending rates (4.75%). The regulator also intends to reduce reinvestment of payments on securities purchased under the pandemic bond repurchase program (PEPP) in the second half of the year by an average of €7.5 billion per month, which will stop reinvestment at the end of the year. IN statement The regulator noted that inflation in the euro area continues to decline, helped by lower prices for food and essential goods.

“Most core inflation indicators are declining, and wage growth is gradually slowing. Financing conditions remain tight and past interest rate hikes continue to weigh on demand, helping to lower inflation, but domestic price pressures remain strong and keep service price inflation high,” the ECB said.

The rate of price growth in the eurozone in March, according to Eurostat, slowed to 2.4%.

The head of the bank, Christine Lagarde, said that economic activity declined in the first quarter due to a decline in industrial production (with stable demand in the services sector), but it is expected to recover during the year with growth in real incomes and wages (due to lower inflation) and improving external conditions (which may increase demand for European goods). Monetary policy will put less and less pressure on demand. If the trend toward inflation approaching the target continues, the regulator will consider it appropriate to “reduce the level of monetary tightening.” Market participants considered this remark to be an indication of the possibility of reducing rates as early as June.

The situation in the euro area industry is not improving, but the European Commission’s plans to increase defense production could kick-start a new growth cycle, the Center notes. The euro area industrial PMI stood at 46.1 in March, up from 46.5 in February, still indicating contraction in activity (less than 50), a trend that has continued since July 2022. Industrial production fell 6.0% in annual terms in January after rising 0.2% in December and has already reached the level of September-October 2020, when the euro area economy had not yet fully recovered from the pandemic, despite lower gas prices.

The situation in the consumer market remains ambiguous, the authors of the review write: the balance sheet consumer confidence index amounted to -4.3 points in March after -5.3 points in February, remaining in the negative zone since October 2021 (the indicator has been growing for two months). The business confidence index fell by 1.5% in March after a contraction of 1.7% in February (it has been declining since May 2022, but has also been growing slightly in the last two months relative to the previous ones). At the same time, car sales are growing at a high rate – in February – by 10.1% after 12.1% in January.

Tatiana Edovina