ECB policymakers push back on rate cut expectations

By Francesco Canepa

SANTIAGO DE COMPOSTELA, Spain (Reuters) -The European Central Bank will keep interest rates high for an extended period and could even raise them again if needed, policymakers said on Friday, pushing back on some market bets that euro zone rates will start falling as soon as next spring.

The ECB raised its key interest rate to a record high of 4% on Thursday but, with the euro zone economy in the doldrums, signalled that its 10th straight hike was likely to be its last. That prompted traders to ramp up speculation on when it will begin lowering borrowing costs.

ECB President Christine Lagarde said the prospect of a future rate cut had not even been mentioned by policymakers during their deliberations this week.

“We have not decided, discussed or even pronounced cuts,” Lagarde told a press conference on Friday. “We will be data-dependent and as I said, level and length of time will matter significantly.”

Lagarde said rates will be kept high for “long enough” to get inflation back to the ECB’s 2% target and there is no calendar attached to this process as decisions will be made meeting-by-meeting, depending on incoming data.

ECB Vice President Luis de Guindos said market expectations are just bets, which could easily turn out to be wrong, as policymakers will focus on data.

“Markets can also be wrong; they are based on a series of hypotheses that sometimes do not come true, that we will start to lower rates in June ’24,” de Guindos told Spanish radio station Cadena Cope.

“It is a bet, it may be right and it may not be right,” De Guindos added.

Latvia’s central bank governor meanwhile dismissed the notion, popularised by market pundits, that Thursday’s move was a “dovish hike” and said policy could still be tightened again if needed.

“I’m comfortable with the current level of rates and I think we’re on track to reach 2% in the second half of 2025,” Martins Kazaks told Reuters on the sidelines of a meeting of European Union financial policymakers in Santiago de Compostela, Spain.

“But if the data tells us that we need another hike, we’ll do it.”

RESTRICTIVE TERRITORY

The ECB said on Thursday it considers interest rates “have reached levels that, maintained for a sufficiently long duration” would help bring inflation back to target.

Lithuanian policymaker Gediminas Simkus said he hoped the ECB was done raising rates.

“I want to hope this is the last dose of medicine – the (last) raise of 25 basis points.”

German finance minister Christian Lindner said the ECB’s decision to raise rates was “understandable” and that it was his government’s job to support the central bank by pursuing a “a moderately restrictive fiscal policy”.

Money markets are now pricing in a slight chance of a rate cut by the ECB as early as April and fully expect a 25-basis-point reduction by July.

“Markets have to take a position but (an April rate cut) is inconsistent with our macro scenario,” Kazaks said. “We’ve clearly said we’ll stay in restrictive territory for as long as necessary to get inflation to 2%.”

Before rates can be cut, the ECB will have to make a decision on hoovering up some of the cash it pumped into the banking system over a decade in which inflation was too low, through a number of bond-buying programmes.

“There is excess liquidity that has to be removed and we’ll have to discuss it,” Kazaks added said. “It has to happen before rates are cut.”

(Reporting By Francesco Canepa; Additional reporting by Maria Martinez in Berlin; Writing by Balazs Koranyi; Editing by Toby Chopra and Catherine Evans)

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