Lagarde Suggests It's Premature to Discuss Interest Rate Reductions

The ECB maintained the interest rate at 4.5%, in keeping with the consensus among analysts.  

Highlights

• The European Central Bank (ECB) kept the main refinancing operations rate steady at 4.50%. 
• The margin lending facility rate was unchanged at 4.75%, while the deposit facility rate stayed at 4.00%. 
• The EUR/USD currency pair retraced its gains as traders responded to the ECB's decision and the following press conference.  

On January 25, 2024, the ECB made its Interest Rate Decision, opting to maintain the rate at 4.5%, aligning with the consensus among analysts. The ECB emphasized that the current interest rates, if sustained over a significant period, would help guide inflation towards the 2% medium-term target.

Lagarde discussed the European economy's likely stagnation in the fourth quarter of 2023, but highlighted positive indications for future growth from forward-looking indicators. The ECB also projected a further decline in inflation for 2024 due to ongoing disruptions in the Middle East impacting supply chains and shipping costs.

Regarding the potential for rate cuts, Lagarde stressed that it was premature to consider such measures according to the broad consensus at the ECB. The significance of wage data in decision-making was underscored, with the ECB awaiting additional data to confirm any slowing in wage growth.

When questioned about the neutral rate, Lagarde disclosed a lack of precise knowledge about its level, emphasizing the ECB's commitment to data-dependent decision-making.

Subsequently, the EUR/USD pair hovered around the 1.0860 level as traders absorbed the ECB Interest Rate Decision and Lagarde's remarks. Uncertainty persisted regarding the timing of potential rate cuts by the ECB.