The European Central Bank left its key interest rate at a record high on Thursday and noted underlying inflation had continued to fall, also thanks to high borrowing costs.

The bank reiterated its key rate would say at at 4% for some time, as investors continue to bet on hefty rate cuts this year.

MARKET REACTION:

STOCKS: European stocks pared losses and were last flat on the day.

FOREX: The euro was little changed, flat against the dollar at $1.0887.

BONDS AND MONEY MARKETS: Interest rate futures continued to price in a roughly 60% chance of a first 25 basis-point ECB rate cut in April, and around 130 bps of cuts by year-end.

Euro zone bond yields edged lower.

COMMENTS:

NEIL BIRRELL, CHIEF INVESTMENT OFFICER, PREMIER MITON INVESTORS, UK:

“The ECB kept interest rates on hold as expected, but it’s all about what happens in the coming months. Will hopes of a cut in the spring be met? It would seem not.”

“Even though the trend in underlying inflation is on a good downward path, the ECB will at least talk tough, and we should expect them to apply a safety-first approach. The risk of ‘too high for too long’ is clear, but so is the risk of inflation.”

MICHAEL BROWNE, CHIEF INVESTMENT OFFICER, MARTIN CURRIE, PART OF FRANKLIN TEMPLETON, LONDON:

“There is nothing new in the statement, which is hardly a surprise. The data is going to put pressure on them to actually cut much sooner and much more like the markets’ view of April. If I put it really simply, economic bad news is good news for the markets because it brings forward rate cuts.”

JAN VON GERICH, CHIEF ANALYST, NORDEA, HELSINKI:

“There was no real market reaction to the ECB, though in response to the U.S. data we saw a small downtick in rates.

“If Lagarde doesn’t want to push back against expectations of rate cuts at the press conference we could see those resurface in the coming hours.”

MARCHEL ALEXANDROVICH, EUROPEAN ECONOMIST, SALTMARSH ECONOMICS, LONDON:

“Those betting on a March rate cut will be disappointed judging from the statement.”

“The question for the press conference is whether there is more nuance in the message and any guidance on what it would take for them to cut rates. We think markets have got way ahead of themselves on rate cut pricing.”

MADISON FALLER, GLOBAL INVESTMENT STRATEGIST, JPMORGAN PRIVATE BANK, NEW YORK:

“It’s not a surprise that the ECB held rates steady today, especially as speakers have been fairly clear that they need to see more confirmation that inflation is moving sustainably back to its target.”

“That jives with the recent push-back against market pricing. The wage data due to be released in June is probably the variable to watch from our end.”

MICHAEL HEWSON, CHIEF MARKET STRATEGIST, CMC MARKETS, LONDON:

“I think it was interesting to note that they placed an awful lot of emphasis on the fact that previous rate increases were starting to be transmitted forcefully. I thought that was a particularly key point in that financial conditions are dampening demand.

My issue is and has consistently been them pushing back on the timing of rate cuts and saying something along the lines of ‘the more you try to price in rate cuts, the more we’ll push back against it’ and delay cutting rates.

The punishment beatings continue. Germany is in absolute hole with no prospect of getting out of it and yet the ECB seem more worried about inflation than they are about a depression.”


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