ECB Lays Ground for June Rate Cut as Inflation Falls

• The European Central Bank kept borrowing costs at record highs on Thursday while cautiously laying the ground to lower them later this year, saying it had made good progress in bringing down inflation. Having underestimated a sudden surge in prices two years ago, the central bank for the 20 countries sharing the euro has been reluctant to declare victory over what turned out to be the most brutal bout of inflation in decades.
• However, with new forecasts pointing to lower inflation and growth, ECB policymakers indicated they were preparing for a first cut in interest rates, possibly in June, provided incoming data, especially on wages, confirms the trend.
• ECB President Christine Lagarde indicated a shift away from the bank's restrictive stance, hinting at potential adjustments in the June 6 meeting, coinciding with the release of Q1 wage data.
• Inflation, including underlying measures, is declining toward the 2% target, leading to a cut in the forecasted price growth for the year. Lagarde emphasized the significance of April and June for gaining insights into economic trends.
• Despite an overall decline in inflation, domestic inflation, especially in services, remains high, with underlying inflation at 3.1%. Contributing factors include falling fuel costs due to the Russia-Ukraine conflict and the ECB's increased borrowing costs.
• The tightened monetary policy has adversely impacted economic growth, prompting the ECB to revise down the projection for the euro zone's GDP expansion from 0.8% to 0.6%. Lagarde highlighted downside risks to economic growth, suggesting a potentially weaker-than-projected growth scenario.

(Source: Reuters)