ECB cites good progress on inflation, needs more data

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. Leaving its main interest rate unchanged at 4.0% as expected, the ECB tweaked its messaging slightly to reflect a continued fall in inflation over the past 1-1/2 years and new, lower economic projections.

The European Central Bank kept borrowing costs at record highs on Thursday and stressed that, while inflation was easing faster than it anticipated only a few months ago, it was still not ready to lower rates. 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.

Leaving its main interest rate unchanged at 4.0% as expected, the ECB tweaked its messaging slightly to reflect a continued fall in inflation over the past 1-1/2 years and new, lower economic projections. "We are making good progress towards our inflation target and we are more confident as a result - but we are not sufficiently confident," ECB President Christine Lagarde told a press conference.

"We will know a lot more in June," she said, adding that there was broad agreement on that point among ECB policymakers. In quarterly economic projections released earlier, the ECB cut its forecast for inflation this year from 2.7% to 2.3%. That could mean inflation hits the ECB's 2% target before the end of this year, rather than in 2025 as it has expected.

But ECB policymakers noted in their statement that while most measures of underlying inflation were easing, domestic price pressures remain high, largely due to strong wage growth. Having managed to talk traders out of betting on a rate cut in early spring, the ECB avoided making promises on Thursday.

Sources have been telling Reuters for months that the central bank is unlikely to reduce borrowing costs before its June 6 meeting as crucial data about wages will only become available in May. This gives the ECB another meeting - on April 11 - to explicitly open the door to what ECB Chief Economist Philip Lane has said is likely be the first in a series of rate cuts.

Investors have pencilled three or four cuts to the 4% rate the ECB pays on bank deposits this year, taking it to 3.25% or 3.0%. LOWER INFLATION AND GROWTH

Inflation has been declining for nearly 18 months, to 2.6% in February. This was partly the result of a steep fall in fuel costs, which had been boosted by Russia's invasion of Ukraine, but also reflected the ECB's steepest ever increase in borrowing costs, which has brought lending to a standstill.

But underlying inflation excluding volatile food and fuel prices was still at 3.1% and an index for the price of services, which are closely linked to wage growth, rose by nearly 4%. The policy tightening has taken a toll on economic growth, which has been stagnating and is likely to continue to be weak.

The ECB now expects the euro zone's GDP to expand by 0.6% compared to 0.8% in its last round of projections in December. (Editing by Catherine Evans)

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