European Central Bank, Citing Wage Growth, Keeps Rates Steady


The European Central Bank on Thursday held interest rates steady for a fourth consecutive meeting, even as policymakers noted the progress that has been made in their battle against high inflation.

The deposit rate remained at 4 percent, the highest in the central bank’s two-and-a-half decade history. Officials are weighing how soon they can bring interest rates down but said they needed to see more proof of slowing price growth. For now, strong wage growth was keeping domestic price pressures high, the bank said.

Because of the improvement so far in slowing headline inflation, “we are more confident,” Christine Lagarde, the president of the European Central Bank, said in a news conference in Frankfurt. “But we are not sufficiently confident and we clearly need more evidence.”

Last month, the annual rate of inflation in the eurozone slowed to 2.6 percent, edging closer to the central bank’s 2 percent target. But policymakers at the bank, which sets interest rates for the 20 countries that use the euro, have been cautious about cutting rates too quickly and reinvigorating inflationary pressures. Economists have warned that the path to achieving the bank’s inflation target is likely to be bumpy.

These concerns played out in the latest inflation report, where the headline rate for February came in higher than economists had expected and core inflation, a critical gauge of domestic price pressure that strips out energy and food prices, was also higher than forecast.

Traders had been betting that interest rates would be cut in June, but started to dampen their expectations after the inflation data was released. Those rate-cut expectations were bolstered again on Thursday as the central bank lowered its inflation forecasts. It now sees inflation averaging 2 percent, meeting its target next year and then falling to 1.9 percent in 2026.

Fueling expectations that policymakers would wait until at least June to change their interest rate stance, Ms. Lagarde said: “We will know a little more in April but we will know a lot more in June.”

Other large central banks are facing a similar challenge over the timing of rate cuts. Headway has been made across Western countries in taming inflation. Still, there are concerns that inflationary pressures haven’t been completely extinguished, especially as lower inflation increases consumers’ spending power. Also, rates on government debt have fallen, which eases financial conditions for businesses and homeowners. These factors may lead central bankers to respond by keeping policy interest rates higher for longer.

In the United States, Jerome H. Powell, the chair of the Federal Reserve, told lawmakers this week that the bank expected to cut rates this year but still wanted to to gain “greater confidence” that inflation was conquered before making a move. Huw Pill, the chief economist of the Bank of England, said last week that Britain’s central bank needed “to guard against being lulled into a false sense of security about inflation developments.”

In the eurozone, the pace of wage gains has become central to the deliberations on rate cuts. E.C.B. policymakers have said they are waiting for companies and employers to make annual salary adjustments, which is often done near the start of the year in Europe. Officials are looking for signs that wage gains are slowing down, or that companies are absorbing the cost of higher wages rather than passing them on to customers in the form of higher prices.

“I’m not suggesting that wages should decline or that wage growth should be dampened,” Ms. Lagarde said. But “we have to be specifically attentive to wages,” she added, because they are an important driver of services inflation, a particularly sticky form of price growth.

There are some early signs that wage growth was moderating and the companies were using their profits to shield customers. However, this data takes a long time to gather.

Pressure is building to cut interest rates to help Europe’s lackluster economy, which has been restrained by higher interest rates. The eurozone grew just 0.5 percent in 2023 and the central bank forecasts it will grow only 0.6 percent this year, cutting its projections from three months ago.

“The economy remains weak,” Ms. Lagarde said, as consumers hold off spending, investment is slowing and companies are exporting less. The economy is expected to recover only gradually over the course of the year.

Even once the central bank decides to cut rates, there will be more division over how quickly and how much to keep cutting. While the economy might not need restrictive monetary policy anymore, it’s unlikely that policymakers will want to return to the easy-money stance of the last decade that was designed to avoid deflation.

“Our future decisions will ensure that policy rates will be set at sufficiently restrictive levels for as long as necessary,” Ms. Lagarde said.


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