Euro Area: ECB stands pat again in December

Euro Area Monetary Policy December 2023

Euro Area: ECB stands pat again in December

At its 14 December meeting, the European Central Bank (ECB) kept the main refinancing operations, marginal lending facility and deposit facility rates unchanged at 4.50%, 4.75% and 4.00%, respectively. The decision, which was unanimous, had been largely expected by market analysts. The ECB delivered 10 consecutive hikes between July 2022 and September 2023—a cumulative increase of 450 basis points. The Bank also decided to advance the normalization of its balance sheet by reducing the pandemic emergency purchase programme (PEPP) by EUR 7.5 billion per month on average during the second half of 2024 and discontinuing reinvestments under the PEPP at end-2024.

The decision to stand pat was underpinned by the ongoing downtrend in inflation and worries about sustained economic weakness in the Eurozone. November saw headline inflation falling to 2.4% from October’s 2.9%—the lowest reading since July 2021; inflation excluding energy, food, alcohol and tobacco eased to 3.6% from 4.2%. Moreover, the Bank dropped the phrase “inflation is still expected to remain too high for too long”, a clear signal that the tightening cycle is over. The ECB consequently revised down its inflation forecasts and now expects headline inflation to average 5.4% in 2023, 2.7% in 2024, 2.1% in 2025 and 1.9% in 2026.

The Bank reiterated that interest rates had reached levels that, if maintained for a sufficiently long duration, would make a substantial contribution to the timely return of inflation to the 2.0% target. The Bank reaffirmed that it was “ready to adjust all of its instruments within its mandate”. In the accompanying press conference, President Lagarde reaffirmed that the board would “continue to follow a data-dependent approach”. Our panelists predict that interest rates have peaked, and a majority expect the ECB to start easing monetary conditions in H1 2024.

The next meeting is scheduled for 25 January 2024.

Commenting on the ECB’s decision, Carsten Brzeski, global head of macro at ING, noted:

“Today’s ECB meeting marks the end of the current rate hike cycle and was the first tentative step towards more dovishness to come. After today’s meeting, however, it should also be clear that the end of a hiking cycle does not imminently lead to a cutting cycle. This is why we still think that the ECB’s road to rate cuts will be longer than markets had been pricing in during the last two weeks.”

Free sample report

Access essential information in the shortest time possible. FocusEconomics provide hundreds of consensus forecast reports from the most reputable economic research authorities in the world.
Close Left Media Arrows Left Media Circles Right Media Arrows Right Media Circles Arrow Quote Wave Address Email Telephone Man in front of screen with line chart Document with bar chart and magnifying glass Application window with bar chart Target with arrow Line Chart Stopwatch Globe with arrows Document with bar chart in front of screen Bar chart with magnifying glass and dollar sign Lightbulb Document with bookmark Laptop with download icon Calendar Icon Nav Menu Arrow Arrow Right Long Icon Arrow Right Icon Chevron Right Icon Chevron Left Icon Briefcase Icon Linkedin In Icon Full Linkedin Icon Filter Facebook Linkedin Twitter Pinterest