Euro Area: ECB stands pat for the third straight meeting in January

Euro Area Monetary Policy January 2024

Euro Area: ECB stands pat for the third straight meeting in January

At its 25 January 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 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 reiterated that it intends to start normalizing 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. December saw headline inflation rising to 2.9% from November’s 2.4%, but ECB President Christine Lagarde stressed that the increase was expected and due to a base effect and “does not detract from the view that the disinflation process is at work”.

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 and reaffirmed that it was “ready to adjust all of its instruments within its mandate” to reach the target. In the accompanying press conference, President Lagarde reaffirmed that the ECB’s 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 7 March.

Commenting on the ECB’s decision, Lee Sue Ann, economist at UOB, stated:

“The latest ECB meeting reinforces our view that the ECB is in no rush to start cutting rates. In fact, it would take a severe recession or a sharp drop in longer-term inflation forecasts to prompt a rate cut in the coming months […]. We expect the ECB to keep rates higher for longer, and if anything, begin lowering rates only in 4Q24, though the risk is for the ECB to begin cutting rates earlier.”

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