Lagarde Signals It’s Too Early To Talk About Rate Cuts

Key Insights

• ECB left the main refinancing operations rate at 4.50%. 
• The margin lending facility rate was left at 4.75%, while the deposit facility rate remained at 4.00%. 
• EUR/USD pulled back as traders reacted to the ECB decision and the subsequent press conference. 

On January 25, 2024, ECB announced its Interest Rate Decision. The central bank decided to leave the rate unchanged at 4.5%, in line with the analyst consensus.

ECB noted that interest rates are at levels that, maintained for a sufficiently long duration, woud push inflation towards the 2% medium-term target.

During the press conference, Lagarde noted that the European economy has likely stagnated in the fourth quarter of 2023. However, some forward-looking indicators were pointing to growth.

According to ECB, inflation continued to decline and was expected to ease further in 2024. Lagarde said that the duration of the conflict in the Middle East could have an impact on inflation as supply chains were disrupted and shipping costs increased.

Lagarde also talked about the timing of potential rate cuts, which is the most important catalyst for markets. According to Lagarde, the broad consensus at the ECB is that it was premature to discuss rate cuts.

Lagarde talked extensively about wage data, which is a significant catalyst in decision making. At this point, ECB is waiting for additional data that could prove that wage growth is slowing down.

Interestingly, Lagarde was asked about the level of the neutral rate. Her answer was that she did not knew the exact level of the neutral rate and that ECB would stay data-dependent in its decision making.

EUR/USD settled near the 1.0860 level as traders reacted to the ECB Interest Rate Decision and the subsequent press conference. Traders are trying to evaluate when ECB will start cutting rates but there’s no clarity on this issue.

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