The European Central Bank (ECB) decided to keep its benchmark interest rates unchanged during its March meeting, aligning with expectations from market observers. Notably, the bank emphasized a further decrease in inflation and reiterated its commitment to restoring price pressures to the medium-term target of 2%.
Projections Point to Delayed Inflation Recovery
The latest projections from the ECB staff paint a picture of falling inflation and moderated growth. Inflation is anticipated to average 2.3% in 2024, followed by 2.0% in 2025 and 1.9% in 2026. Despite adjustments indicating a slight decline in inflation, persistent domestic price pressures remain, partly attributed to robust wage growth.
Forward Guidance and Data-Dependent Approach
Frankfurt reaffirmed its commitment to a data-dependent approach in determining the trajectory of monetary policy. The Governing Council intends to assess economic data, particularly inflation dynamics and economic conditions, to guide its decisions on policy adjustments in the future.
Policy Continuity with Asset Purchase Program
No changes were announced regarding the Asset Purchase Programme (APP) or the Pandemic Emergency Purchase Programme (PEPP). The gradual reduction of the APP portfolio continues as scheduled, while the ECB plans to reduce the PEPP portfolio by an average of €7.5 billion per month starting in the latter half of 2024.
Market Response and Expectations
Following the release of the ECB’s projections, markets reacted with anticipation of rate cuts. Futures on short-term interest rates imply expectations of a full percentage point of rate cuts, with the first expected by June. Market reactions included a weakening euro against the dollar, declines in sovereign bond yields, and a rally in European equity indices, fueled by increased expectations of rate cuts. Investors eagerly await remarks from ECB President Lagarde for further insights into the bank’s stance and future actions.
SOURCE: Ref Image from Yahoo News Singapore
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