- Rate hold was widely expected

- As inflation wanes, are growth concerns paramount?

- Analysts forecast months with rates at current levels

- Economy to remain weak, ECB president warns

By Eric Culp

European Editor, LiveSquawk News

@EricCulpLS

26 October 2023 | 15:20 GMT

FRANKFURT – This month, policymakers at the European Central Bank decided to get out of town and out of the rate-hiking business with a trip to Athens, where they voted to keep the lender’s three main interest rates at current levels after 10 straight increases.

Officials warned last month that a pause – or even the end – in the tightening cycle was possible and perhaps even likely, which led the vast majority of analysts to correctly predict Thursday’s decision by the bank to leave the Eurozone’s key interest rates as is.

The lender rehashed last month’s statement about the effectiveness of policy moves to date: “The governing council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. Based on its current assessment, the governing council considers that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal.”

With timing as the only main sticking point, analysts are already predicting rate cuts for next year, a subject unbroached in the two-day meeting, according to ECB President Christine Lagarde. She said Thursday’s decision was unanimous, monetary policy will remain dependant on the latest economic data, and further rate hikes could not be ruled out.

But fewer and fewer monetary mavens expect additional increases. “The rapid fall in inflation has made the ECB more comfortable with putting further interest rate hikes on hold,” Nordea chief analyst Jan von Gerich wrote on X. “The pause in hikes is likely to prove permanent.”

Price growth running out of steam

The bank repeated its concern that inflation is expected “to stay too high for too long”, noting that domestic price pressures remain strong.

While it’s true that current annual rate of headline consumer price growth is more than double the bank’s target, the measure fell to 4.3% last month to shed nearly a percentage point from August. Some people might say it’s dropping faster than if it were hot and in the hands of Snoop Dog.

Core inflation, which is more aligned with ECB sensibilities, also fell sharply, dropping to 4.5% last month from 5.2% in August.

In addition, apparently there’s more where that came from, according to the bank. “Most measures of underlying inflation continue to decline. Measures of longer-term inflation expectations mostly stand around 2%,” which, as noted, is the bank’s medium-term target. With that in mind, some officials with a dovish bent are likely already saying, “Job done.”

With inflation still high but on the slide, the need for a rate hike was likely considered less acute than last month. It is important to note that the official ECB script is the one-phrase mantra of “control inflation” uttered ad infinitum, but officials like to help growth – or at least avoid slowing it – where they can, and this time they did so by not piling more borrowing costs onto many a burdened European household and business.

The decision to standby on rates came at time when Lagarde called the European economy “weak,” with flagging growth expected through the end of the year before activity picks up in 2024. She even cited the most recent purchasing managers’ indices as an example of the grimness of it all – the preliminary composite reading for this month slumped to its lowest mark in nearly three years.

A hike too far?

During the press conference following Thursday’s rate decision, a journalist asked Lagarde if the bank had maybe gone too far with rate hikes considering the current state of the economy. She skirted the issue to repeat how the transmission of ECB monetary policy to lower prices and the lender’s solitary focus on inflation.

ECB enthusiast Carsten Brzeski, head of macroeconomics at ING Bank, wrote on X that the amount of talk on a certain subject Thursday was telling. “Given the time Lagarde today spends on explaining the adverse impact of monetary policy on the real economy, one could wonder whether the ECB really thought it could hike rates by 450bp and have no impact on the economy.”

A number of economists have predicted that the Eurozone economy shrank last quarter and will contract in the current three-month period. That, at least technically, would be a recession.