ECB leaves eurozone interest rates on hold but hints at cut this summer – as it happened

The euro has dipped against the US dollar; it’s down 0.2% at $1.072, as traders weigh up the ECB’s hint that rates could be lowered soon.

The European Central Bank has also signalled that a cut to interest rates is coming soon, if inflationary pressures continues to fall.

Having left its key interest rates on hold today, the ECB suggests it could cut rates if its next forecasts show inflation pressures are easing.

Those forecasts will be ready for the ECB’s next meeting, in early June, and will show whether inflation is falling towards its 2% target, or not.

The ECB says:

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.

Newsflash: the European Central Bank has left interest rates across the eurozone on hold.

The ECB has annnounced that borrowing costs will remain unchanged, after the governing council’s latest meeting, in Frankfurt today.

That’s despite inflation falling again last month, to 2.4%, near the ECB’s 2% target.

The means that the rate on the ECB’s main refinancing operations, which is the rate banks pay when they borrow money from the ECB for one week, remains at 4.5%

The rate on the deposit facility, which banks can use to make overnight deposits with the Eurosystem, sticks at 4%, which is an alltime high.

The rate on the marginal lending facility, which offers overnight credit to banks from the Eurosystem, remains at 4.75%.

Announcing the decsion, the ECB says:

Inflation has continued to fall, led by lower food and goods price inflation. Most measures of underlying inflation are easing, wage growth is gradually moderating, and firms are absorbing part of the rise in labour costs in their profits.

Financing conditions remain restrictive and the past interest rate increases continue to weigh on demand, which is helping to push down inflation. But domestic price pressures are strong and are keeping services price inflation high.

The City watchdog has criticised Neil Woodford over the collapse of his flagship fund in 2019, saying the former star investor had a “defective” view of some of his responsibilities.

The FCA released a warning notice against Woodfood, and against his Woodford Investment Management (WIM) today.

In it, the regulator alleges that Woodford had “a defective and unreasonably narrow understanding of his responsibilities for managing liquidity risks”, but has not yet said what sanctions it could take.

Lawyers for Woodford have said he “disagree(s)” with the FCA’s findings, PA Media reports.

Woodford’s investment empire imploded after a series of bad bets, and investments in illiquid assets which couldn’t be told quickly when investors began trying to withdraw their funds.

Today, the FCA also criticised Link Fund Solutions, the administrators of the fund but decided not to fine LFS – as this would leave less money to distribute to out-of-pocket investors.

Therese Chambers, joint executive director of enforcement and market oversight, explains:

‘Link Fund Solutions’ job was to properly manage the Woodford Equity Income Fund and to protect investors’ interests. Their failings led to losses for those trapped in the fund when it was suspended.

‘It is right that they compensate investors for the losses that resulted from their failings, and we’re pleased that the scheme has started making payments.’

The Bank of England’s next scheduled interest rate decision is in early May, when few in the City expect a change of policy.

The money markets indicate that a cut in rates, from 5.25% to 5%, is just an 8% possibility, with a 92% chance that the Bank’s MPC leaves borrowing costs unchanged.

As well as floods at home (see earlier post), UK food prices could also be pushed higher by droughts abroad.

Satellite images suggest that Morocco’s second-largest reservoir is drying up. Al Massira Dam contains just 3% of the average amount of water that was there nine years ago, the BBC reports.

The reservoir serves some of Morocco’s major cities, and is also central to farm irrigation.

Amber Sawyer, analyst at the Energy and Climate Intelligence Unit (ECIU) warns that UK consumers depend on Moroccan farmers for a variety of fresh fruit and vegetables.

Last year a third (32%) of our tomatoes and more than two thirds (43%) of our raspberries and Brussels sprouts (41%) came from Morocco. While we can grow some of these crops in the UK, extreme weather has been wreaking havoc here UK too. British farmers have just experienced the wettest 18 months since records began, which has devastated multiple crops including sprouts.

We also get produce from Morocco that we can’t grow here, like a quarter of our mandarins and around a tenth of our clementines and watermelons.

The UK imports around half its food, half of which we can’t grow here. As climate change worsens, the threat to our food supply chains – both at home and overseas – will grow.

Several investment banks have been cutting their forecasts for how soon, and how rapidly, America’s central ban will cut US interest rates.

After yesterday’s sharper rise in US inflation than expected, economists are ripping up their forecasts.

Jefferies, for example, now expect the first Fed rate cut to come in July, not June. It now expects two cuts in 2024, not three.

Wells Fargo has pushed its forecast for the first rate cut to September, from June, as has UBS.

BNP Paribas now expects two Fed cuts this year, in July and December, having previously pencilled them in for June, September and December.

Inflation in Ireland has fallen.

The Consumer Price Index (CPI) across the Republic rose by 2.9% between March 2023 and March 2024, down from 3.4% in the year to February.

The Central Statistics Office reported that this is the fifth month running where the inflation rate was lower than 5%.

Anthony Dawson, Statistician in the CSO’s Prices Division, said:

Today’s publication of the Consumer Price Index (CPI) shows that prices for consumer goods and services in March 2024 rose by 2.9% on average when compared with March 2023.

This is the fifth time since September 2021 that the annual growth in the CPI was below 5%. It is also the fifth consecutive month where the inflation rate was lower than 5%.

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Efforts to bring down UK inflation could be thwarted by bad weather hitting food production.

UK farmers’ efforts to plant crops this year has been hampered by the exceptionally wet weather in recent months.

Farming groups have warned that production yields will suffer, and that the prices of goods such as bread and other food made using grains are likely to rise further. That wil hurt shoppers.

The government has launched a new fund to help farmers who were caught up in Storm Henk, which caused flooding across England at the start of the year.

The National Farmers Union has just criticised the fund though, saying many farms under water can’t access the money because it excludes farms which are 150 metres or more away from a main river.

NFU vice president Rachel Hallos says there are “major issues” with the new fund:

We are hearing from numerous members who have suffered catastrophic impacts who have been told they are not eligible for the Fund because some of their affected areas are more than 150 metres from ‘main’ rivers. These include members with 90% of their land saturated or underwater, and huge damage to buildings and equipment.

We are taking this up with Defra urgently.

I cannot believe this is what Ministers intended when they launched the Fund, which was a welcome and well-intentioned development which seems to have been fundamentally let down in the detail. While the impact of the weather goes far beyond Storm Henk, this could have been a good start but, as it stands, it simply doesn’t work.

Ruth Gregory, deputy chief UK economist at Capital Economics, argues that falling UK inflation will allow the Bank of England to start cutting rates this summer.

She told clients:

Even if the US Federal Reserve leaves its policy rate unchanged for longer than we expect, our forecast that inflation in the UK will be lower than in the US suggests this won’t prevent the Bank of England from cutting rates from 5.25% to 5.00% in June and to 3.00% next year.

But the Bank will be alive to the risk that inflation proves more resilient as it has in the US.

June is earlier than the financial markets are now expecting, with the first cut only fully priced in for September.