ECB's Lagarde insists Eurozone rate cuts will be 'data dependent, not Fed dependent'

It's not good news at all if you're in the market for a mortgage or looking to borrow cash to invest in a business. Conversely, for savers, the European Central Bank keeping its deposit rate at 4 percent, where it has been since September 2023, represents the best deal in recent memory.

Christine Lagarde, ECB President, announced on Thursday that the interest rate would remain unchanged despite inflation coming down to 2.4 percent across the Eurozone, closing in on the ECB target of 2 percent annually. There was a hint that things may change at the next meeting in June.

According to the ECB: "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 increase further 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."

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There is a groundswell of support among ECB decision-makers to cut the base rate of interest at the June meeting. It's been one of the worst-kept secrets in European finance that this is the plan. 

The situation in the United States may upset that. Consumer Price Index (CPI) data put inflation higher than expected and poured cold water on the US Federal Reserve (Fed) cutting its interest rates this summer.

Without saying it directly, Lagarde told reporters that what happens in the United States will have an impact due to the size of the U.S. economy.

She said: "Anything that happens matters to us and will, in due course, be embedded in the projection that will be prepared and released in June. The United States is a very large market, a very sizable economy, a major financial sector as well."

Data dependent

However, Lagarde stressed that any decisions made on Eurozone rate cuts would be "data dependent, not Fed dependent."

It's already been pointed out by Per Jansson, Deputy Governor of the Central Bank of Sweden - which is outside the Eurozone - that should the ECB cut rates this summer and the US not do so, it would cause an issue for both the Swedish krona and the euro. 

According to Jansson, a European rate cut without reciprocation in the US in 2024 could present a "problem" resulting from the weakening of the currency on exchange markets. That, in turn, could see inflation rise.

That also means that goods priced in U.S. dollars internationally, like crude oil, have become more expensive for European buyers. That has already started to happen, with the euro down 1.3 percent against the dollar after Wednesday's inflation news from the United States.

Despite the ECB's hopes to cut the interest rate in June and Lagarde's insistence that data, not the Fed, will drive decisions on rate cuts, trade and currency exchange implications will have to play a major role in ECB rate cut decisions. This is heavily dependent on what happens with the Fed.

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