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.

“Interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution,” to returning inflation to the bank’s 2 percent target in a timely manner, the central bank said in a statement. “The Governing Council’s future decisions will ensure that policy rates will be set at sufficiently restrictive levels for as long as necessary.”

Last month, the annual rate of inflation in the eurozone slowed to 2.6 percent, edging closer to the central bank’s 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 are likely to be bolstered again, as the central bank lowered its inflation forecasts on Thursday. It now sees inflation averaging 2 percent, meeting its target, next year and then falling to 1.9 percent in 2026.

Other large central banks are facing a similar challenge. Headway has been made across Western countries in taming inflation. But there are still concerns that inflationary pressures haven’t been completed 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 recent weeks, E.C.B. policymakers have said they need to wait for additional data to be more confident that inflation is under control. In particular, 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.

“Although most measures of underlying inflation have eased further, domestic price pressures remain high, in part owing to strong growth in wages,” the central bank said.

But 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.

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, its unlikely that policymakers will want to return to the easy-money stance of the last decade that was designed to avoid deflation.