FRANKFURT – As the Eurozone flirts with recession, its leading central bankers have retired to Athens to hammer out plans for monetary policy. The first step will likely be to do nothing.
Analysts said they expect the European Central Bank to hold rates at current levels after a series of 10 consecutive hikes that began in July 2022. The reasons to stay the course seem multitudinous at the moment: two wars within a two-day drive of ECB headquarters – both of which could expand past their current boundaries – falling inflation, further growth concerns in Europe, a sputtering global economy, jumps in European bond yields, possible shifts in the geopolitical power structure, and a range of other factors are likely giving rate-setters ample grounds for taking a breather.
Carsten Brzeski, head of macroeconomics at ING, said: “If anything, developments since the September meeting have made it even easier for the European Central Bank to pause.”
He said the bank has already clearly indicated that the October meeting would be an intermediate one as officials waited for new information from the Bank Lending Survey, GDP growth in the third quarter, and a new round of staff projections – all of which will only be available for the December meeting.
“As much as the ECB has tried to keep the door to further rate hikes open since the September decision, recent developments have clearly complicated this position,” he explained. “While the conflict in Israel and the Middle East – as well as the rise in bond yields – will further dampen Eurozone growth prospects, the surge in oil prices will put new upward pressure on inflation and could make reaching the 2% target at the end of 2025 more unlikely.”
The ECB’s very reason for existence is to hold inflation at 2% in the medium term, but running a close second is its unwritten policy of supporting economic growth, or at least not undermining it.
The latest data from purchasing managers in the currency area was grim, with the preliminary composite reading for October falling to its lowest point in nearly three years. At 46.5 points, it pushed further away from growth territory on the other side of the 50 mark. “The Eurozone economic downturn accelerated at the start of the fourth quarter,” pollster S&P Global said.
As past and predictive economic indicators continue to tank, raising borrowing rates seems like a bad move, a line of reasoning likely to pervade among decision-makers on the bank’s governing council, especially after ECB President Christine Lagarde said last month that the economic slowdown in the Eurozone was expected to extend into early next year.
You were warned
As Deutsche Bank noted, the bank pre-announced a pause last month when it said, “The governing council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target”.
The German lender said it expects this message to be repeated Thursday. “The sentence encompasses both a guiding principle – in a first order sense the key dimension of rates policy is now the duration of the pause rather than the level of rates – and optionality – what is meant by ‘sufficiently long’ will be determined by the relative strength of the hawks versus the doves.”
According Deutsche, the bank will hold rates at current levels until September of next year, when it will announce a cut.
Most other observers have also predicted a steady hand on the interest rate tiller until sometime in 2024, when the ECB will then switch tack and begin to cut interest rates.
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- Is it 10 hikes and done?
- Growth concerns to tie hands of bank officials
- Data dependency means wait until December
- Rate decision due Thursday at 12:15 GMT/14:15 CET
- Press conference set for 12:45 GMT
By Eric Culp
European Editor, LiveSquawk News
@EricCulpLS
25 October 2023 | 10:10 GMT
FRANKFURT – As the Eurozone flirts with recession, its leading central bankers have retired to Athens to hammer out plans for monetary policy. The first step will likely be to do nothing.
Analysts said they expect the European Central Bank to hold rates at current levels after a series of 10 consecutive hikes that began in July 2022. The reasons to stay the course seem multitudinous at the moment: two wars within a two-day drive of ECB headquarters – both of which could expand past their current boundaries – falling inflation, further growth concerns in Europe, a sputtering global economy, jumps in European bond yields, possible shifts in the geopolitical power structure, and a range of other factors are likely giving rate-setters ample grounds for taking a breather.
Carsten Brzeski, head of macroeconomics at ING, said: “If anything, developments since the September meeting have made it even easier for the European Central Bank to pause.”
He said the bank has already clearly indicated that the October meeting would be an intermediate one as officials waited for new information from the Bank Lending Survey, GDP growth in the third quarter, and a new round of staff projections – all of which will only be available for the December meeting.
“As much as the ECB has tried to keep the door to further rate hikes open since the September decision, recent developments have clearly complicated this position,” he explained. “While the conflict in Israel and the Middle East – as well as the rise in bond yields – will further dampen Eurozone growth prospects, the surge in oil prices will put new upward pressure on inflation and could make reaching the 2% target at the end of 2025 more unlikely.”
The ECB’s very reason for existence is to hold inflation at 2% in the medium term, but running a close second is its unwritten policy of supporting economic growth, or at least not undermining it.
The latest data from purchasing managers in the currency area was grim, with the preliminary composite reading for October falling to its lowest point in nearly three years. At 46.5 points, it pushed further away from growth territory on the other side of the 50 mark. “The Eurozone economic downturn accelerated at the start of the fourth quarter,” pollster S&P Global said.
As past and predictive economic indicators continue to tank, raising borrowing rates seems like a bad move, a line of reasoning likely to pervade among decision-makers on the bank’s governing council, especially after ECB President Christine Lagarde said last month that the economic slowdown in the Eurozone was expected to extend into early next year.
You were warned
As Deutsche Bank noted, the bank pre-announced a pause last month when it said, “The governing council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target”.
The German lender said it expects this message to be repeated Thursday. “The sentence encompasses both a guiding principle – in a first order sense the key dimension of rates policy is now the duration of the pause rather than the level of rates – and optionality – what is meant by ‘sufficiently long’ will be determined by the relative strength of the hawks versus the doves.”
According Deutsche, the bank will hold rates at current levels until September of next year, when it will announce a cut.
Most other observers have also predicted a steady hand on the interest rate tiller until sometime in 2024, when the ECB will then switch tack and begin to cut interest rates.