FRANKFURT – As expected, the European Central Bank held interest rates at levels set in September, but policymakers dashed meagre hopes for hints about upcoming reductions in borrowing costs, with bank president Christine Lagarde noting that officials failed to discuss such moves.
The bank said it left its main refinancing rate at 4.5% and reiterated a deposit rate of 4.0%.
The decision followed a spate of central bank announcements that began Wednesday evening. Rate holds came from the US Federal Reserve, the Swiss National Bank, and the Bank of England, with the Norges Bank in Oslo surprising markets with a rate hike.
Eurozone monetary officials warned that consumer price growth was still a danger. In a statement, the ECB said: “While inflation has dropped in recent months, it is likely to pick up again temporarily in the near term.”
Speaking during the post-decision press conference, Lagarde warned of an increase in December inflation due to an upward base effect for the price of energy.
Some of the most recent inflation forecasts (blue) were revised down from September estimates.
However, staff at the central bank lowered their inflation projections for the coming year, fuelling speculation that it’s only a matter of time before the ECB announces rate cuts.
The bank lowered its outlook for annual headline inflation next year to 2.7% after forecasting 3.2% in September, it held the projection for 2025 at 2.1% and predicted a rate of 1.9% in 2026.
The ECB’s inflation target is 2% over the medium term.
Consumer price growth in November fell more than expected, dropping to 2.4%, its lowest mark in over two years, according to preliminary data from the EU statistics office Eurostat.
The annual core rate also eased in November, Eurostat said, but it only fell to 3.6%, a long way from the ECB target.
Steady as she goes
Lagarde, who said she was recovering from Covid-19 and coughed repeatedly during the press conference, noted that staying the course is also continuing the fight against inflation. “We still think there is more to be done. That can take the form of holding.”
Before announcing a rate hold in October, the bank had raised rates 10 straight times.
For the moment, it looks like more of the same monetary policy, which will likely be true until at least after the winter, according to analysts.
The ECB said in its quest to return inflation to target, “key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal”.
Additionally, the subject of reducing interest rates never reached confabulation status during the two-day meeting of the bank’s governing council, according to Lagarde. “We did not discuss rate cuts at all. No discussion, no debate.”
“For now, we still think that the ECB’s shift to full dovishness will be more gradual than markets are pricing in,” wrote Carsten Brzeski, head of macroeconomics at ING bank. “Today’s policy announcements and the staff projections nicely confirm this. And, in fact, it is hard to see how the ECB could decide on a full U-turn on policy rates only on the back of a few weaker-than-expected inflation prints without headline inflation falling below 2% and the longer-term inflation forecasts still being at around 2%.”
Bank forecasts less growth next year, announces end date for PEPP reinvestment
Along with reductions in inflation forecasts, ECB economists reduced projections for economic growth in the euro area. GDP is expected to increase only 0.8% next year, a mark lowered from 1.0% in September. The update held the 2025 estimate at 1.5% and revealed a forecast of 1.5% for 2026.
The bank also announced that it would stop reinvestments from its Pandemic Emergency Purchase Programme (PEPP) at the end of next year, with tapering of an average of EUR 7.5bn a month to start in Q3. “This is really balance-sheet normalisation,” Lagarde said, noting that some officials wanted the slowdown in repurchases to begin earlier or later before the governing council decided on a start date.
Mark Wall, chief European economist at Deutsche Bank, addressed the announcement in a note, suggesting that perhaps “getting the PEPP announcement out of the way now reduces the hurdle to earlier rate cuts in 2024. While the PEPP exit makes it appear like the ECB is not shadowing the Fed’s dovish pivot, it may have subtly opened the door.”
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- Officials decide for second straight hold
- Data dependency still in effect
- Staff cuts inflation, growth projections
- Policymakers did not discuss rate cuts – Lagarde
- PEPP to be wound down by end of 2024
By Eric Culp
European Editor, LiveSquawk News
@EricCulpLS
14 December 2023 | 15:30 GMT
FRANKFURT – As expected, the European Central Bank held interest rates at levels set in September, but policymakers dashed meagre hopes for hints about upcoming reductions in borrowing costs, with bank president Christine Lagarde noting that officials failed to discuss such moves.
The bank said it left its main refinancing rate at 4.5% and reiterated a deposit rate of 4.0%.
The decision followed a spate of central bank announcements that began Wednesday evening. Rate holds came from the US Federal Reserve, the Swiss National Bank, and the Bank of England, with the Norges Bank in Oslo surprising markets with a rate hike.
Eurozone monetary officials warned that consumer price growth was still a danger. In a statement, the ECB said: “While inflation has dropped in recent months, it is likely to pick up again temporarily in the near term.”
Speaking during the post-decision press conference, Lagarde warned of an increase in December inflation due to an upward base effect for the price of energy.
However, staff at the central bank lowered their inflation projections for the coming year, fuelling speculation that it’s only a matter of time before the ECB announces rate cuts.
The bank lowered its outlook for annual headline inflation next year to 2.7% after forecasting 3.2% in September, it held the projection for 2025 at 2.1% and predicted a rate of 1.9% in 2026.
The ECB’s inflation target is 2% over the medium term.
Consumer price growth in November fell more than expected, dropping to 2.4%, its lowest mark in over two years, according to preliminary data from the EU statistics office Eurostat.
The annual core rate also eased in November, Eurostat said, but it only fell to 3.6%, a long way from the ECB target.
Steady as she goes
Lagarde, who said she was recovering from Covid-19 and coughed repeatedly during the press conference, noted that staying the course is also continuing the fight against inflation. “We still think there is more to be done. That can take the form of holding.”
Before announcing a rate hold in October, the bank had raised rates 10 straight times.
For the moment, it looks like more of the same monetary policy, which will likely be true until at least after the winter, according to analysts.
The ECB said in its quest to return inflation to target, “key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal”.
Additionally, the subject of reducing interest rates never reached confabulation status during the two-day meeting of the bank’s governing council, according to Lagarde. “We did not discuss rate cuts at all. No discussion, no debate.”
“For now, we still think that the ECB’s shift to full dovishness will be more gradual than markets are pricing in,” wrote Carsten Brzeski, head of macroeconomics at ING bank. “Today’s policy announcements and the staff projections nicely confirm this. And, in fact, it is hard to see how the ECB could decide on a full U-turn on policy rates only on the back of a few weaker-than-expected inflation prints without headline inflation falling below 2% and the longer-term inflation forecasts still being at around 2%.”
Bank forecasts less growth next year, announces end date for PEPP reinvestment
Along with reductions in inflation forecasts, ECB economists reduced projections for economic growth in the euro area. GDP is expected to increase only 0.8% next year, a mark lowered from 1.0% in September. The update held the 2025 estimate at 1.5% and revealed a forecast of 1.5% for 2026.
The bank also announced that it would stop reinvestments from its Pandemic Emergency Purchase Programme (PEPP) at the end of next year, with tapering of an average of EUR 7.5bn a month to start in Q3. “This is really balance-sheet normalisation,” Lagarde said, noting that some officials wanted the slowdown in repurchases to begin earlier or later before the governing council decided on a start date.
Mark Wall, chief European economist at Deutsche Bank, addressed the announcement in a note, suggesting that perhaps “getting the PEPP announcement out of the way now reduces the hurdle to earlier rate cuts in 2024. While the PEPP exit makes it appear like the ECB is not shadowing the Fed’s dovish pivot, it may have subtly opened the door.”