FRANKFURT (Reuters) - The European Central Bank kept interest rates at record highs on Thursday but sent an even clearer signal that it may be preparing to cut them as euro zone inflation continues to fall.
The central bank for the 20 countries that share the euro currency kept its deposit rate at 4.0%, where it has been since September as part of a 1-1/2-year effort to rein in prices.
But, with inflation now close to the ECB's 2% target, bank lending at a standstill and the economy barely growing, the ECB dropped fresh hints about a possible cut at its next meeting.
"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 further increase 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," the ECB said.
ECB policymakers, including those who typically favour higher rates, have been lining up behind a rate reduction at their June 6 meeting, provided key indicators including wage growth and underlying inflation continue to moderate.
But that decision may now be complicated by uncertaintywhether the Federal Reserve will be able cut its own rates in June as U.S. inflation stays stubbornly above its goal.
ECB President Christine Lagarde is likely to be asked about the central bank's plans for June and the possibility of a further cut in July at her regular news conference at 1245 GMT.
With Thursday's decision, the ECB also left the interest rate on its daily and weekly loans for banks at 4.75% and 4.50% respectively.
Banks have barely tapped these auctions for years as they still have plenty of cash from last decade's money-printing programmes.