ECB keeps rates steady, markets up bets on rate cuts

A view of the European Central Bank (ECB) headquarters in Frankfurt, Germany March 16, 2023. REUTERS/Heiko Becker/File Photo

LONDON  -The European Central Bank left interest rates unchanged, as expected, on Thursday but acknowledged that inflation is easing faster than it previously expected, potentially opening the way for rate cuts later this year.

The ECB has held borrowing costs at record highs since September and has so far batted back any call for a rate cut, even if policymakers are now openly acknowledging that such a move is coming and only the timing is up for debate.

READ: ECB to hold rates and take baby steps towards first cut

A sharp fall in short-dated bond yields suggested traders were growing confident of rate cuts in the months ahead.

Market reaction

The euro initially slipped against the dollar, but pared some of those losses to trade at $1.0894, unchanged from where it was prior to the decision, and unchanged on the day. The euro fell 0.3 percent against sterling to 85.35 pence.

READ: Euro zone inflation dips but stubborn core prices may worry ECB

Germany’s rate-sensitive two-year bond yield fell 6 basis points (bps) on the day to 2.81 percent , having traded flat at around 2.84 percent earlier.

Money markets rate cut bets edged up, with traders pricing in almost 100 bps worth of easing by year-end, versus 90 bps earlier in the day.

Meanwhile, European shares rose 0.9 percent and banking stocks were down 0.2 percent .

The STOXX 600 index had been up 0.4 percent ahead of the decision. European real estate stocks, which rose after the decision, were last up 1.6 percent on day.