The European Central Bank kept interest rates unchanged on Thursday, as expected, snapping an unprecedented streak of 10-year increases and maintaining the forward guidance of a tight monetary policy.
The ECB has raised rates by a total of 4.5 percentage points since July 2022 to prevent runaway inflation, but last month it announced it would stop as high borrowing costs began to create a dent in the economy.
Price pressures are finally easing, and inflation has more than halved in a year, while the economy has slowed so much that a recession may have begun, raising market bets. because the rate hike is over and the ECB’s next move is a cut.
Intending to keep all options open, the ECB said it would continue with a “data-dependent” approach and that decisions would be based on future data.
“The ECB’s official interest rates are at a level that, if maintained for a sufficiently long time, will contribute significantly to the inflation target,” the bank said in a statement after the meeting in Athens for the first time in 15 years.
“Forthcoming decisions will ensure that their official interest rates are set at sufficiently tight levels as long as necessary,” the ECB said.
The decision to keep rates unchanged is likely to bolster expectations that the world’s major central banks, including the US Federal Reserve, have completed tightening monetary policy, ending an unprecedented rate synchronization series.
This is likely to cause markets to focus on how long rates should be kept at their current highs, a complicated exercise as investors are already betting that the ECB’s next move will be a cut in that June, with two fully operational discounts for next October, a deadline that some bank leaders consider unrealistic.
Another complication is that the rise in energy costs, fueled by the new conflict in the Middle East, will keep inflation under pressure as well as growth. This will mark a disastrous period of stagflation, where inflation is high while growth stagnates.
Economic prospects appear more precarious, putting the so-called “soft landing” at risk.
Industry is in recession, confidence indicators are pointing down, consumption is being lowered and even the labor market is starting to weaken, all of which suggest a decline in the second half of 2023.
In Thursday’s decision, the ECB’s deposit rate remained at a record level of 4%, while the main rate stood at 4.5%.
BOND PORTFOLIO LOSS?
Attention will now turn to ECB President Christine Lagarde’s press conference at 1245 GMT.
You may be asked if the bank’s leadership discussed an early reduction in the bond portfolio of the bank’s €1.7 trillion Pandemic Emergency Purchase Program (PEPP) (1.8 trillion dollars).
The wording of the ECB statement on PEPP remained unchanged and the bank reiterated its promise to reinvest all income from the maturity of the loan until the end of 2024.
However, some ECB leaders have said publicly that such a commitment is too high and that the bank should think again, as it is currently tightening its policy.
The complication is that the ECB uses these reinvestments as the “first line of defense” for weak euro zone economies like Italy, because it can adjust public debt purchases to insulate them from unwanted market volatility.
This suggests that any change in the program is not imminent and, in any case, will be gradual.
