The European Central Bank (ECB) on Thursday held interest rates at 4%, signalling no policy action for the fourth-consecutive month and following in the Federal Reserve's cautious footsteps.

Like the Fed, there was no major shift towards dovishness in the following press conference, where ECB president Christine Lagarde said that current levels of policy were being maintained "for a sufficiently long duration" to bring inflation back down to its 2% target.

The central bank did lower its inflation forecasts. The ECB now expects inflation to average 2.3% this year, down from December's forecast of 2.7%, and sees the rate averaging 2% in 2025, down from 2.1%.

Market Reaction

Markets responded positively, with the higher-for-longer rates scenario boosting the euro against the dollar and expectations of rate cuts later in the year pushing stock prices higher.

ASML Holding NV (NASDAQ:ASML), Europe's biggest company, and is a maker of semiconductor manufacturing equipment, gained 3.1% to $1,034. Europe's biggest chipmaker Infineon Technologies AG (OTC:IFNNY) gained 3% to $38.

ASML is the largest holding in the iShares MSCI Eurozone ETF (NYSE:EZU), which climbed 1.3% to $50.34 following the ECB's decision.

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On foreign exchanges, the euro currency was supported against its rivals, up 0.5% against the dollar with one euro buying $1.2786.

The ProShares Ultra Euro ETF (NYSE:ULE), an exchange-traded fund that tracks euro performance, was up 0.3% at $11.61.

Analyst Reaction

"All in all, today's meeting was a clear and well-structured meeting with an unambiguous message that for now, it's too early to discuss rate cuts, but the time for that will come," said Carsten Brzeski, global head of macro at ING.

"We think it will be in June. Let's hope that today's meeting will also end the cacophony of national central bankers commenting on the timing of future rate cuts, which has resembled something of a noisy atonal choir in recent weeks," Brzeski added.

Althea Spinozzi, head of fixed income strategy at Saxo Bank, said: "The ECB inflation forecasts are bullish for EU bonds across tenors because they show inflation is not a problem and stagflation is intensifying. Thus, the ECB must engage in aggressive cuts soon to rescue the economy."

Mohamed El-Erian, chief economic adviser at Allianz, said: "The market mover is that it notably revised down its 2024 inflation forecast on the back of more favorable non-services inflation. Market yields are lower as a result."

A June rate cut from the ECB would time exactly with what's expected from the Fed in the U.S. and would signal a policy shift that's likely to be followed soon after by many developed market central banks.

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Photo: Christine Lagarde, Shutterstock