ECB Decision Keeps Rates on Hold

The European Central Bank (ECB) recently announced its decision to keep interest rates unchanged, signaling its commitment to maintaining stability in the face of economic uncertainties. The ECB plays a crucial role in shaping the monetary policy that affects not only the eurozone but also the global economic landscape.

The Governing Council meets regularly to assess economic conditions and determine the appropriate policy measures to achieve its inflation target. The European Union is more complex for monetary policy than the US for example, thus the ECB is generally slower and more cautious in changing policy.

The ECB’s decision to maintain unchanged interest rates is influenced by various factors, including the outlook for inflation, considerations of the governing council, and the implications of recent rate increases on future policy decisions.

President Christine Lagarde of the ECB noted more evidence was needed that inflation was under control before any rate cuts. The market still thinks rate cuts are in store for 2024. These rate cuts could be bigger initially than expected because there is a risk that the ECB could fall behind the curve, thus perhaps a rate cut of 0.50 in June. During the World Economic Forum in Davos, Legarde stated that the risk of cutting to late was better than cutting too early. Thus, the market has taken this risk preference by the ECB and extrapolated a potential bigger cut in June. In fact, Legarde mentioned the summer for rate cuts at Davos.

Inflation in the Eurozone (The Harmonized Index of Consumer Prices – HICP) has creaped up a bit to 2.9% in December higher than the previous reading. The core annual HICP has gone down to 3.4% YoY down from the 3.6% in November but core inflation is still double the 2% mandate for the ECB.

Thus the rate of its main refinancing operations is kept at 4.5% while the rate paid on commercial deposits is 4%. And the overnight credit rate to banks remains at 4.75%. These tight conditions in financing are being transmitted to the market resulting in less demand which means pressure on inflation to go down.

Importance of ECB press conferences

The ECB holds press conferences following monetary policy decisions and these are crucial in providing insights into the rationale behind the decisions, the economic outlook, and the ECB’s assessments of various factors influencing the economy. These press conferences offer an opportunity for market participants, analysts, and the public to gain a comprehensive understanding of the ECB’s stance on monetary policy and its future course of action.

Factors that may lead to changes in monetary policy towards the second half of 2024

The second half of 2024 presents a timeframe that may see shifts in the ECB’s monetary policy stance. Factors such as evolving economic conditions, inflation dynamics, and global developments could influence the ECB’s decisions, potentially leading to adjustments in interest rates or the implementation of alternative policy measures to address changing circumstances.

In our view, one of the factors is that could keep rates stubbornly high is supply chain disruptions caused by the attacks on shipping in the Red Sea by the Houthis. On the other hand, a gloomy outlook for the Eurozone economy argues for rate cuts. The Ifo Institute publishes a survey of German business confidence and the rate fell to 85.2 its lowest level since May of 2020 during Covid-19. This was lower than forecasts of 86.7, which shows how gloomy confidence is in the biggest economy in Europe.