The ECB kept base interest rates unchanged

The European Central Bank (ECB) at its meeting on March 7, as expected, kept all three base interest rates at the same levels. The interest rate on loans is still 4.5% per annum, on deposits – 4%, on margin loans – 4.75%. The regulator’s updated forecast published today showed that the ECB is generally satisfied with the current rate of inflation slowdown. However, monetary policy easing is still not expected until at least the summer – the regulator needs a pause to confirm the sustainability of current trends.

Following the meeting on March 7, the ECB Governing Council again saved Monetary policy parameters: the rate on loans was kept at 4.5%, on deposits – 4%, on margin loans – 4.75%.

Since the end of 2023, there has been no intrigue around the regulator’s decisions—the cycle of rate increases has effectively ended. What is of interest is rather the signals about the future of monetary policy given by the ECB.

The updated forecast has revised guidance for 2024–2026. According to ECB estimates, inflation in 2024 will be 2.3%, in 2025 – target 2%, in 2026 – 1.9% (in December forecast: 2.7%, 2.1% and 1.9%, respectively ). Core inflation targets (excluding food and energy) have also been revised downwards: Core CPI is expected to be 2.6% in 2024, 2.1% in 2025 and 2% in 2026 (versus 2. 7%, 2.3% and 2.1% forecast in December).

The regulator is satisfied with the current rate of inflation slowdown – past forecasts did not directly indicate this. The ECB associates some risks with internal price pressure, which, let us explain, remains quite serious due to rising wages. However, the current high level of rates, according to the regulator’s estimates, makes it possible to compensate for this effect that provokes an increase in inflation.

Let us recall that in February, according to Eurostat estimates, inflation in the euro area slowed to 2.6% from 2.8% in January. Analysts expected a slightly more significant decline in the indicator – to 2.5%. Core inflation amounted to 3.1% in February (3.3% in January, forecast – 2.9%). A softening of the monetary policy is not expected until June – the ECB emphasizes that much will depend on the dynamics of the indicator (and the sustainability of the rate of decline) in the first half of the year.

The ECB is not expecting much from the euro area economy this year. It is assumed that, despite the improvements being recorded, the business activity index will not return to “pre-war” values ​​in 2024.

It should be noted that in February, the aggregate PMI in the euro area increased noticeably: to 49.2 points from 47.9 in January, which, however, is explained by the ongoing recovery in services; the industrial indicator is still in deep negative territory (for more details, see below). “Kommersant” dated February 22).

Speaking about the weaknesses of the economy, ECB head Christine Lagarde drew attention to the decline in European exports. Moreover, if previously this was associated exclusively with weak external demand (including in China), now the regulator is ready to recognize the decrease in the competitiveness of goods supplied to the world market – this, apparently, may apply to one of the largest European economies – Germany.

As a result, according to ECB forecasts, GDP growth this year could be 0.6% (in December it was expected to be 0.8%), in 2025 – 1.5% (1.5%), in 2026 – 1. 6% (1.5%). In the next two years, economic growth, as the regulator expects, will be supported by both domestic consumption and investment.

Kristina Borovikova