ECB to maintain rates and signal potential future cuts

ECB in focus: The European Central Bank (ECB) is expected to keep interest rates at record levels on Thursday and indicate a gradual approach towards potential rate cuts in the coming months as inflation continues to decline.

In response to a sudden surge in prices two years ago, the ECB has been cautious about declaring victory over inflation, despite recent improvements. 

It is widely anticipated to maintain its policy rate at a record 4.0 per cent, with policymakers stressing the need for more evidence that inflation remains under control.

The ECB's updated economic projections are likely to reflect lower economic growth and inflation for the year, potentially prompting adjustments to the central bank's messaging. 

While the ECB is not expected to reduce borrowing costs before its June meeting, there is speculation about future rate cuts, possibly beginning as early as April.

Investors anticipate multiple rate reductions by the end of the year, which could bring the ECB's deposit rate down to 3.25 per cent or 3.0 per cent.

Inflation has been declining for nearly 18 months, partly due to a drop in fuel costs and the ECB's recent increase in borrowing rates. 

However, core inflation, excluding volatile items, remains elevated, fueled by wage increases.

The ECB's quarterly economic projections are expected to confirm these trends, with inflation expectations for the year likely to be revised downwards. 

GDP growth forecasts for 2024 may also be adjusted downwards, reflecting a weaker-than-expected recovery, particularly in Germany.

Several members of the ECB's Governing Council have begun discussing the possibility of rate cuts, although opinions remain divided.

ECB President Christine Lagarde is expected to address questions about the ECB's ongoing review of its framework for guiding market rates and the central bank's increasing losses. 

While a new framework has been agreed upon, no formal announcement is expected until later this month at the earliest.

(With Reuters Inputs)