ECB keeps rates on hold, Lagarde pushes back on market expectations

(Reuters) -The European Central Bank left interest rates unchanged on Thursday and gave no hint of a possible reduction, reaffirming instead its commitment to fighting inflation.

The bank reiterated its key rate would stay at 4% for some time, and ECB President Christine Lagarde reiterated in a press conference after the decision that policymakers needed to be more confident that inflationary pressures really had subsided before moving towards cutting rates.

The euro fell against a range of other currencies, while European shares cut their losses and traded in positive territory.

MARKET REACTION:

STOCKS: European stocks rose 0.2%, having erased earlier losses. An index of euro zone banking shares was down 0.6%, while tech stocks rallied 1.3%.

FOREX: The euro fell by as much as 0.3% to a session low of $1.0854 and was last at $1.0845.

BONDS AND MONEY MARKETS: Interest rate futures continued to price in a roughly 60% chance of a first 25 basis-point ECB rate cut in April, but around 140 bps of cuts by year-end, compared with 130 bps before the rate decision.

Euro zone bond yields edged lower.

COMMENTS:

SEEMA SHAH, STRATEGIST, PRINCIPAL ASSET MANAGEMENT, LONDON

"Although President Lagarde 'stands by' her previous comments which suggested that summer cuts are likely, the rest of her narrative appears to be supportive of earlier rate cuts. As she noted, risks to economic growth are to the downside, underlying inflation remains on a downward trend, and wage growth is declining. The ECB is clearly data dependent, but the data they focus on are pointing to a rate cut within the next few months, potentially April. Summer might come early this year."

FLORIAN IELPO, HEAD OF MACRO, LOMBARD ODIER ASSET MANAGEMENT, GENEVA:

"The wrap-up seems to be: too soon for a pivot, but the March meeting should be the perfect occasion for that. Two more inflation reports and projections being revisited will give enough meat to the council to reach potentially that decision.

When it comes to markets, markets have already priced in most of what they could in terms of rates cuts for the moment – the ECB is clearly split between the lower inflation and expected recovery."

"Currently, odds of a cut around the end of the summer are gaining in probability, driving the euro down – let’s see if it holds until the end of the day."

COLIN FINLAYSON, FIXED INCOME INVESTMENT MANAGER AT AEGON ASSET MANAGEMENT, EDINBURGH:

"The ECB kept policy unchanged at 4%, as widely expected. Although Ms Lagarde attempted to push back on the current market expectations of rate-cuts in the coming month, she did have to concede that both underlying inflation and inflation expectations have continued to fall.

With the ECB current growth outlook characterised as having risks to the downside, the market paid little attention to her attempts to dampen rate-cut enthusiasm. The ECB are guiding towards the summer at the earliest for any rate cuts to begin, but we feel that they may not have the luxury of waiting that long."

NEIL BIRRELL, CHIEF INVESTMENT OFFICER, PREMIER MITON INVESTORS, UK:

"The ECB kept interest rates on hold as expected, but it’s all about what happens in the coming months. Will hopes of a cut in the spring be met? It would seem not."

"Even though the trend in underlying inflation is on a good downward path, the ECB will at least talk tough, and we should expect them to apply a safety-first approach. The risk of 'too high for too long' is clear, but so is the risk of inflation.”

MICHAEL BROWNE, CHIEF INVESTMENT OFFICER, MARTIN CURRIE, PART OF FRANKLIN TEMPLETON, LONDON:

"There is nothing new in the statement, which is hardly a surprise. The data is going to put pressure on them to actually cut much sooner and much more like the markets' view of April. If I put it really simply, economic bad news is good news for the markets because it brings forward rate cuts."

JAN VON GERICH, CHIEF ANALYST, NORDEA, HELSINKI:

“There was no real market reaction to the ECB, though in response to the U.S. data we saw a small downtick in rates.

“If Lagarde doesn’t want to push back against expectations of rate cuts at the press conference we could see those resurface in the coming hours.”

MARCHEL ALEXANDROVICH, EUROPEAN ECONOMIST, SALTMARSH ECONOMICS, LONDON:

"Those betting on a March rate cut will be disappointed judging from the statement."

"The question for the press conference is whether there is more nuance in the message and any guidance on what it would take for them to cut rates. We think markets have got way ahead of themselves on rate cut pricing."

MADISON FALLER, GLOBAL INVESTMENT STRATEGIST, JPMORGAN PRIVATE BANK, NEW YORK:

"It's not a surprise that the ECB held rates steady today, especially as speakers have been fairly clear that they need to see more confirmation that inflation is moving sustainably back to its target."

"That jives with the recent push-back against market pricing. The wage data due to be released in June is probably the variable to watch from our end."

MICHAEL HEWSON, CHIEF MARKET STRATEGIST, CMC MARKETS, LONDON:

“I think it was interesting to note that they placed an awful lot of emphasis on the fact that previous rate increases were starting to be transmitted forcefully. I thought that was a particularly key point in that financial conditions are dampening demand.

My issue is and has consistently been them pushing back on the timing of rate cuts and saying something along the lines of ‘the more you try to price in rate cuts, the more we’ll push back against it’ and delay cutting rates.

The punishment beatings continue. Germany is in absolute hole with no prospect of getting out of it and yet the ECB seem more worried about inflation than they are about a depression.”

(Reporting by the London Markets Team, compiled by Yoruk Bahceli; editing by Amanda Cooper)