ECB governors signal no shift in interest rates until march

European Central Bank (ECB) governors anticipate maintaining their stance on the necessity of high-interest rates until their March meeting, making the possibility of a rate cut before June challenging, according to sources familiar with the matter. The ECB, led by President Christine Lagarde, opted to keep borrowing costs at record levels, countering market expectations of an imminent rate reduction, albeit with limited success.

Insiders revealed that a potential shift towards a more 'dovish' stance, akin to the US Federal Reserve's recent openness to future rate cuts, would hinge on the data's trajectory leading up to, at the earliest, their March 7 meeting. Considering a rate cut before June, a timeframe aligning with the publication of crucial wage data for the next year appears complex, sources noted, creating a divergence from the market's current expectations by at least two months.

The sources attributed this disparity to differing perspectives on inflation. While investors anticipate a sustained decline in inflation, many central bankers view it as a temporary phenomenon. Some suggested that a rate cut might be feasible before June if inflation consistently falls below expectations.

However, others cautioned that the ECB should strongly resist traders' expectations or risk undermining its recent tightening efforts, marked by ten consecutive rate hikes in the past 1-1/2 years. A spokesperson for the ECB declined to comment on the matter, and Lagarde underlined the central bank's commitment to being "data-dependent" rather than "time-dependent."

Public statements from ECB governors on Friday further indicated a lack of urgency in reducing rates. Bundesbank President Joachim Nagel said that it was "too early to sound the all-clear" on inflation, while Robert Holzmann dismissed queries about the timing of a rate cut. Banque de France's governor, Francois Villeroy de Galhau, acknowledged a potential reduction in borrowing costs but indicated the ECB would remain at a "plateau" for rates for an extended period.

Market expectations currently suggest a 50 per cent chance of a 25-basis-point rate cut in March, followed by successive reductions in every meeting through December. If realised, this trajectory would bring the ECB's rate on bank deposits down to 2.5 per cent by the end of next year, compared to the current 4.0 per cent.

(With Reuters inputs)