ECB holds rates, signals steady hand as economy stumbles
THE European Central Bank left interest rates unchanged as expected on Thursday (Oct 26) snapping an unprecedented streak of 10 consecutive rate hikes, and maintained its guidance which signals steady policy ahead.
The ECB has lifted rates by a combined 4.5 percentage points since July 2022 to combat runaway price growth but hinted last month that it would pause as record high borrowing costs are starting to work their way through 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 already be under way, boosting market bets that rate hikes are finished and the ECB’s next move will be a cut.
ECB President Christine Lagarde told a news conference that “future decisions will ensure that our policy rates will be set at sufficiently restrictive levels for as long as necessary”.
She added that the ECB will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction.
“In particular, our interest rate decisions will be based on our assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission,” Lagarde said.
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The decision to keep rates unchanged is likely to reinforce expectations that the world’s biggest central banks, including the US Federal Reserve, are essentially done tightening policy, ending an unprecedented series of synchronised rate hikes.
That is likely to shift market focus to just how long rates need to stay at their current highs, a tricky exercise as investors are already betting on the next ECB move to be a cut as soon as June, with two full moves priced in by next October, a timeline some policymakers consider unrealistic.
Another complication is that rising energy costs, given a boost by the new conflict in the Middle East, could keep inflation under pressure just as growth falters. That would herald a damaging period of stagflation, where inflation is high while growth stagnates.
Lagarde said the ECB is “very attentive” to economic risks posed by the conflict between Israel and Palestinian militant group Hamas as well as the war in Ukraine.
“We are monitoring the situation, we are very attentive to the economic consequences that that could have, whether in terms of direct or indirect impact on energy prices, or the level of confidence that economic actors will continue to display.”
With Thursday’s decision, the ECB’s deposit rate stays at a record high 4 per cent, while the main rate stands at 4.5 per cent.
The wording of the ECB’s statement on the Pandemic Emergency Purchase Programme remained unchanged, and the bank repeated its promise to reinvest all proceeds from maturing debt through the end of 2024.
However, some policymakers have publicly said that such a commitment is excessively long and the bank should have another think, given that it is now tightening policy.
The complication is that the ECB uses these reinvestments as its “first line of defence” for vulnerable eurozone economies like Italy, because it can adjust its purchases of government bonds to insulate them from undue market volatility.
That suggests that any change in the scheme is not imminent and would in any case be gradual. REUTERS, AFP
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