FRANKFURT (Reuters) – The European Central Bank (ECB) chose on Thursday to maintain its key rate at its current level, citing a vigorous transmission of past rate increases to financial conditions and falling inflation.
The deposit rate is maintained at 4%, its highest level since the creation of the euro in 1999, after having been raised ten times since July 2022.
Christine Lagarde, President of the ECB, told a news conference that the eurozone economy was weak, but she stressed that price pressures remained strong and could be further aggravated if the conflict in the Middle East led to an increase in energy costs.
“We must show constancy. This is today’s decision: we maintain our position,” declared Christine Lagarde, adding that any discussion on the future evolution of interest rates, including concerning reductions rate, was premature.
“Inaction is sometimes synonymous with action. A decision to maintain is significant,” she said, adding that it was taken unanimously.
Speaking in Athens, where ECB officials met for the first time in 15 years, Lagarde said it was clear that the rate hikes agreed so far had had a significant impact on the economy. , in particular by reducing the production of bank loans. The German ten-year yield fell 4.6 basis points to 2.841% at 1:53 p.m. GMT, compared with an 8bp drop for the Italian 10-year, to 4.837%.
The decision to keep rates unchanged is expected to reinforce expectations that the world’s biggest central banks, including the Federal Reserve, are all but done tightening monetary policy, ending an unprecedented series of simultaneous rate hikes.
Investors are already betting on a rate cut from the ECB as early as June 2024 and on two cuts by next October, a timetable that some monetary policy makers consider unrealistic.
ECONOMY
The economic outlook for the eurozone is getting darker.
The industry is in recession, leading indicators are in decline, consumption is sluggish and even the job market has started to weaken, which suggests a contraction in the second half of 2023.
“The economy is expected to remain weak until the end of the year,” Lagarde said. “But with inflation continuing to fall, real household incomes recovering and demand for eurozone exports recovering, the economy is expected to strengthen over the coming years.”
Inflation in the euro zone, which stood at 4.3% in September, is expected to fall to around 3.1% in October, according to consensus. This rate remains well above the ECB’s 2% target.
PEPP
The ECB’s statement on the PEPP remained unchanged in the press release, and the bank reiterated its promise to reinvest all maturities until the end of 2024.
Christine Lagarde indicated that there had been no discussion on an anticipated reduction of the PEPP reinvestment program.
However, some monetary policy makers say this commitment is excessively long and that the bank should think again.
However, these reinvestments constitute the “first line of defense” for vulnerable economies in the euro zone such as Italy, with the ECB being able to adjust its purchases of government bonds to protect the weakest economies from excessive volatility. .
This suggests that any changes to the PEPP are not imminent and would in any case be gradual.
(Written by Balazs Koranyi, Francesco Canepa, Corentin Chappron, edited by Jean-Stéphane Brosse)
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