When Will the European Central Bank Start Cutting Rates?

If what goes up must come down, then the urgent question on the minds of many in Europe is when will interest rates begin dropping? For months, rates have been set at the highest in the European Central Bank’s history.

Investors have been betting that the central bank will cut rates quite soon — possibly in April. Traders figure rates must come down because inflation has slowed notably — it’s been below 3 percent since October — and the region’s economy is weak. By the end of year, the central bank will have cut rates by more than one percentage point, or between five and six quarter-point cuts, trading in financial markets implied.

Policymakers, however, are trying to pull market opinion in the other direction and delay the expectations of rate cuts. Many of the central bank’s Governing Council are wary of declaring victory over inflation too soon, lest it settle above the bank’s target of 2 percent.

On Thursday, the European Central Bank stuck to this outlook. It held interest rates steady, leaving the deposit rate at 4 percent, where it has been since September.

Rates are at levels that, “maintained for a sufficiently long duration, will make a substantial contribution” toward returning inflation to 2 percent in a “timely manner,” Christine Lagarde, the president of the bank, said on Thursday.

The region needs to be “further along” in the disinflation process before the bank can be confident that inflation will stay at target, she added.


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