European Central Bank set to hold rates as market debates cut timeline

The European Central Bank is set to hold interest rates at their current record high after its monetary policy meeting on Thursday — while investors are hungry for guidance on possible rate cuts.

They may be disappointed.

"The January ECB meeting this Thursday is, as usual, unlikely to deliver any policy changes or major policy messages, involving instead a reflection on the year ahead," economists at Société Générale said in a Tuesday note.

Minutes from the ECB's December meeting, released last week, showed that the central bank is highly unlikely to hike rates again, but that any discussion of easing is considered premature. The minutes suggest a status quo until at least June, Société Générale said.

Markets are nonetheless pricing in around a 60% probability of the first rate cut taking place in April, according to a Reuters analysis of LSEG data. High expectations for a March cut have been pushed back in recent weeks, but April pricing is staying put despite numerous ECB officials arguing that trims may be premature.

Dutch Central Bank President Klaas Knot told CNBC at the World Economic Forum in Davos last week that current market bets could be "self-defeating," because "the more easing the market has already done for us, the less likely we will cut rates."

ECB President Christine Lagarde told Bloomberg that she agreed with those who see a summer cut as likely, but stressed at the time that she remained "reserved" and data dependent in her final outlook.

Headline euro area inflation ticked higher in December, rising to 2.9% from 2.4%, largely due to base effects from the energy market. Core inflation fell to 3.4%, from 3.6%.

Price rises have cooled faster than some central bank officials expected, even as they emphasize