Euro Area: ECB stands pat for first time in 15 months

Euro Area Monetary Policy October 2023

Euro Area: ECB stands pat for first time in 15 months

At its 26 October 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 expected by most market analysts. It followed 10 consecutive hikes since July 2022—a cumulative increase of 450 basis points.

The decision to stop hiking was underpinned by the ongoing downtrend in inflation and increased worries about sustained economic weakness in the Eurozone. September saw headline inflation falling to 4.3% from August’s 5.2% and inflation excluding energy and food easing to 4.5% from 5.3%. That said, the Bank considers that inflation, even if on a downtrend, will remain above target for an extended period, stating that it “is still expected to remain too high for too long”.

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. To this end, the Bank restated that it was “ready to adjust all of its instruments within its mandate”. In the accompanying press conference, President Lagarde clarified that the board would “continue to follow a data-dependent approach”. Our panelists predict that interest rates have peaked and the majority expect the ECB to start easing monetary conditions in H1 2024.

The next meeting is scheduled for 14 December.

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

“The ECB has never been more worried about the growth outlook and relatively relaxed about potential new inflation waves, stemming from oil prices. As a result, unless the Eurozone economy miraculously rebounds in the coming weeks, we expect today’s dovish pause to eventually be seen as the end of the hiking cycle.”

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