European Central Bank Signals Coming Rate Cut, Setting Up Split With Fed

The European Central Bank gave its clearest signal yet on Thursday that it might lower interest rates at its next policy meeting, in June.

The indication that European policymakers would push ahead with rate cuts in the next few months as inflation slows and the region’s economy languishes opens up a divergence with the United States, where price pressures are still relatively hot.

The E.C.B., which sets interest rates for the 20 countries that use the euro, held rates steady, keeping the deposit rate at 4 percent, the highest in its history. It was the fifth consecutive decision to leave rates untouched. But officials added that if incoming data — on consumer prices and the effect of past rate increases — gave them more confidence that inflation was on a sustainably lower path, they would start pulling back the restrictive policy stance.

“In June, we know that we will get a lot more data,” Christine Lagarde, president of the bank, said at a news conference in Frankfurt.

Officials will look at that data and new economic forecasts for the eurozone and “determine whether all of that confirms that inflation returns to target in a sustained manner,” she said. They are waiting to have their confidence reinforced, she added.

A few members of the 26-person Governing Council were ready to begin lowering rates at this week’s meeting, Ms. Lagarde said, but they joined the consensus, which preferred to wait for more information.

Central bankers on both sides of the Atlantic have been trying to work out the delicate timing of when to loosen their policy. They don’t want to keep rates higher longer than necessary and hurt their economies. At the same time, they don’t want to ease too soon and revive price pressures. Considerable progress has been made in bringing inflation down from its multidecade highs in late 2022, but returning inflation all the way to their targets, typically 2 percent, is expected to be a bumpy process.

In the eurozone, “inflation is expected to fluctuate around current levels in the coming months and to then decline to our target next year,” Ms. Lagarde said, as wage growth slows and the impact of the pandemic and energy crisis continues to fade.

Last month, inflation in the eurozone slowed to 2.4 percent, closing in on the central bank’s target. Policymakers, wanting to be sure that price growth stays low, have focused on core inflation. That number better reflects domestic price pressures because it excludes volatile energy and food prices, which are heavily influenced by global prices. In March, core inflation slowed to 2.9 percent, more than economists expected.

Ms. Lagarde warned on Thursday that inflation in the services sector was still high, evidence that some price pressures were still persistent in the bloc. The central bank has also been watching wages, considered a sticky source of services inflation. Officials expect to get more data on annual wage negotiations by the June policy meeting.

So far, wage pressures are easing as hoped. The central bank said on Thursday that wage gains were “gradually moderating” while companies were absorbing some of the cost of higher wages in their profits, rather than passing it on to customers.

Investors are betting heavily that the E.C.B. will cut rates three times this year, starting in June.

By comparison, inflation in the United States has come in hotter than expected for three months in a row, upending expectations that the Federal Reserve might start cutting rates this summer.

“That the E.C.B. goes first is unusual,” analysts at Berenberg bank said a note. “But the difference in current economic performance more than justifies that.”

On Wednesday, data showed the U.S. Consumer Price Index rose to 3.5 percent in March, up from 3.2 percent the previous month. Investors quickly reduced their bets on rate cuts, pushing up yields on government bonds, which affects borrowing costs.

Analysts at Royal Bank of Canada said they now expected the Fed to start rate cuts in December. But it was too soon to know, they said, if that divergence would persist. The idea that European central banks would deliver a deep rate-cutting cycle while the Fed kept rates high for an extended period “seems very questionable to us,” the analysts wrote in a note.

“We are data dependent, we are not Fed dependent,” Ms. Lagarde said. But she acknowledged that what happened in the United States, such as moving financial markets and currency exchange rates, did have an impact on Europe, an effect that get embedded into the central bank’s economic forecasts, she said.

European policymakers steered clear of suggesting a longer-term trajectory for interest rates, giving no signs of how many times and how quickly they might continue to cut rates once they started.

“We are not pre-committing to a particular rate path,” Ms. Lagarde said. “But the direction is rather clear.”

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