ECB hammers home message its inflation fight is not over, but markets still see spring rate cut

President Christine Lagarde told reporters she stood by remarks last week which were widely interpreted as meaning the ECB would start cutting at some time during the summer

ECB president Christine Lagarde maintained the campaign of hiking interest rates since summer 2022 was working in reining in inflation.

European Central Bank president Christine Lagarde hammered home the message that the central bank is not for cutting interest rates any time soon, but financial markets continue to bet squeezed conditions of the eurozone economy will force it to cut before the summer.  

No major economist ahead of the Frankfurt gathering of the governing council had predicted the ECB would announce a rate reduction, but the ECB has appeared to be concerned its messaging would be ignored for it to be forced to cut before it was fully confident it had secured victory over soaring prices. 

The central bank on Thursday left the rates on the main refinancing operations, its marginal lending facility, and its deposit facility unchanged at 4.5%, 4.75% and 4%, respectively.    

Ms Lagarde told reporters she stood by remarks she made at the World Economic Forum in Davos last week, which were widely interpreted as meaning the ECB would start cutting at some time during the summer months.  

Financial markets remain unconvinced the ECB will wait as long.  

Interest rate futures continue to price in a roughly 60% chance of a first quarter point ECB rate cut in April, and making a total of 1.3% in cuts by the end of the year.  

Any early rate cut would automatically be welcome news for Irish holders of tracker mortgages, whose interest rate repayments are tied to ECB rate moves, and which have soared the most since the summer of 2022, mortgage brokers have said.  

Irish tracker holders can expect deep cuts by the end of the year, if market expectations hold up, but all mortgage holders, including the 70,000 households whose fixed-rate mortgage terms expire this year, will have to make some tough decisions, experts have said. 

At the press conference, Ms Lagarde said it would be premature to discuss what economic indicators were showing into the early spring, but maintained the campaign of hiking interest rates since summer 2022 was working in reining in inflation, as almost all indicators of underlying inflation were showing.

However, "we need to be further along in the disinflation process before we can be sufficiently confident that inflation will actually hit the target in a timely manner and at a sustainable way at target", Ms Lagarde said. 

The process was working "but we need to be further along in that process", she said, and the ECB would deploy a tracker on eurozone wage increases developed by its chief economist Philip Lane to better help it understand simmering domestic price pressures.    

Some Irish brokers have also warned rate cuts this year may not be as deep as financial markets believe, because the ECB will be wary of calling an end too early in its fight against inflation. The  decade of record low interest rates for households and businesses would unlikely be coming back again, they said. 

Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics predicted: "If the economic outlook is weaker than they expected and if core inflation keeps falling more quickly than the bank forecasts, cuts could come in April or June".