The European Central Bank froze borrowing costs again on Thursday even as inflation eased, signalling it was too soon to start considering rate cuts.

The third consecutive pause since October leaves the ECB's benchmark deposit rate at a record high of four percent, following a historic run of hikes to tame prices that shot up after Russia's war in Ukraine.

The pause was widely expected but with inflation steadily slowing and the eurozone economy stuttering, investor attention has shifted to when the ECB might start cutting rates.

The ECB's governing council reiterated in its statement that it believed rates are at levels that "maintained for a sufficiently long duration, will make a substantial contribution" to returning inflation to the two-percent target.

Financial markets have been betting on rate reductions as early as April, but ECB president Christine Lagarde sought to douse those hopes last week when she said the first cut was "likely" only by the summer - and only if the latest economic data supported such a move.

The ECB is "in no rush yet" to change course and governors may not even have discussed cuts at this week's meeting, Deutsche Bank economists said in an analyst note.

Lagarde is expected to again push back against early rate cut bets, and reiterate that the ECB's next moves will be "data dependent"

In the United States, where investors have been pencilling in a first rate cut in March, Federal Reserve officials have also been tempering expectations, indicating more work remains to be done to return inflation safely to the long-term target of two percent.

Norway's Norges Bank also held its benchmark rate at 4.5 percent on Thursday and said it would likely remain there "for some time".

- Wages in focus -

Like other central banks, the ECB has been walking a tightrope between raising borrowing costs enough to convincingly rein in inflation without squeezing demand so hard it crashes the economy.

After peaking at more than 10 percent last year, eurozone inflation has declined in recent months. Consumer price growth picked up slightly in December however, to reach 2.9 percent. 

The increase was expected and mainly due to the comparison effect with a year earlier, when governments provided exceptional support to help households after Russia's invasion of Ukraine pushed energy prices higher.

Overall, the ECB sees inflation on the right path and has forecast a return to target in 2025.

"Aside from an energy-related upward base effect on headline inflation, the declining trend in underlying inflation has continued," the ECB said Thursday.

More expensive borrowing costs have curbed demand for loans and mortgages, contributing to a weakening of the eurozone economy.

"Tight financing conditions are dampening demand, and this is helping to push down inflation," the ECB said.

Output in the 20-nation currency club shrank by 0.1 percent in the third quarter of 2023, and analysts see another modest contraction in the fourth quarter.

The slowdown has boosted calls for lower rates, but ECB officials have stressed that the battle against inflation was not yet won.

Lagarde told Bloomberg television last week that the ECB was closely monitoring several risk factors that could drive prices up again, including wage negotiations as workers seek pay rises to compensate for higher living costs.

It will take several months to get a clearer picture of euro area wage agreements, she said, bolstering the case for a rate cut at the June meeting at the earliest.

The ECB was also keeping a close eye on energy costs and supply chains, Lagarde told Bloomberg, in a nod to tensions in the Middle East and shipping delays in the Red Sea that could impact prices and weigh on economic growth.

"Lagarde will likely keep the door wide open for a first cut in June without fully committing to it already," Berenberg economists said.