The European Central Bank held borrowing costs at a record high as expected on Thursday but signalled it may soon cut interest rates, even as investors increasingly questioned whether its U.S. counterpart will follow along.
The ECB has kept interest rates steady since September but has long signalled that cuts were coming into view, with policymakers awaiting a few more comforting wage indicators to accompany benign inflation figures before pulling the trigger.
"If the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction," the ECB said.
The ECB said that incoming information has broadly confirmed its previous inflation assessment while wage growth was moderating and firms were absorbing more of the labour cost increases via their profit margins. Nevertheless, domestic price pressures are strong and are keeping services price inflation high, the ECB said in a statement.
The biggest complication could be if the U.S. Federal Reserve delays its own policy easing after hotter-than-forecast inflation data. The world's biggest central bank generally sets the tone for global financial markets. But even that would only slow and not stop the ECB, given a widening gap in performance between the U.S. economy and that of the 20-country euro zone, economists said. The currency bloc is now in its sixth straight quarter of economic stagnation and the labour market is starting to soften.
The U.S. economy, on the other hand, continues to grow above trend, its labour market remains tight and inflation rose more than expected last month, raising the risk of price growth getting stuck. ECB policymakers have long pointed to a June rate cut, a de facto pre-commitment according to financial markets, and walking back from that would damage the central bank's credibility.
