The bank left its main policy rate at 4% and said current borrowing costs may be just enough to tame inflation if they stay at current levels for “sufficiently long”. The ECB did not make a change to its balance-sheet run off process, pledging to continue reinvesting bonds under its 1.7 trillion-euro Pandemic Emergency Purchase Programme until the end of next year. The euro offered little reaction to the initial decision, trading 0.2% lower against the dollar, while euro zone bank shares were in the red, but above session lows. MARKET REACTION: FOREX: The euro initially dropped against the U.S. dollar before paring some of that decline to last trade down 0.1% at $1.055.BONDS: Euro zone bond yields dropped and the closely watched spread between Italian and German 10-year bond yields fell below 200 basis points. STOCKS: European stocks recouped some of their losses, with the STOX 600 index last down 0.2% and banks down 0.3%, having fallen earlier by as much as 0.7% on the day.COMMENTS:MARK WALL, CHIEF EUROPEAN ECONOMIST, DEUTSCHE BANK RESEARCH, LONDON: “For the first time since summer 2022, the ECB has not hiked policy rates any further. The ECB says that patience is now key. Only by keeping rates at the current restrictive level for sufficiently long can it be sure that inflation will get back to target. The question is, how long is sufficiently long?”JULIEN LAFARGUE, CHIEF MARKET STRATEGIST, BARCLAYS PRIVATE BANK, LONDON: “As expected, the ECB decided to leave interest rates unchanged while reiterating the ‘higher for longer’ narrative. It hasn’t provided any further colour as to how it will handle the winding down of the PEPP. Going into the press conference there are two key questions: What does the ECB intend to do with its balance sheet and the various programs it is still running? And when will the ECB acknowledge that inflation has come down enough to ease back its monetary policy stance?With a rapidly deteriorating macroeconomic landscape, as shown by October PMIs, in our view the ECB will have to tread very carefully going into 2024 and will have no choice but to lower interest rates.”DANIELE ANTONUCCI, CHIEF INVESTMENT OFFICER, QUINTET PRIVATE BANK, LONDON: “Today’s ECB decision confirmed our view that interest rates are likely to have reached a plateau. Inflation is still expected to stay elevated, but it dropped further lately, and most gauges of underlying inflation have continued to ease.At the same time, it’s also becoming more evident that the economy is slowing. We expect a mild recession in the euro area over the coming months.These two dynamics, slowly declining inflation but still above target and weakening economic activity, suggest that we’re at peak rates. But, as the inflation battle isn’t fully won yet, we expect the ECB to keep rates restrictive for some time to ensure there’s no inflation resurgence.”RICHARD GARLAND, CHIEF INVESTMENT STRATEGIST, OMNIS INVESTMENTS:”The ECB has officially joined the Pause Party of central bankers in wait-and-watch mode. This makes sense – inflation is falling quite sharply and they had signalled last month that the direction of travel for rates will be sideways. ‘Higher for longer’ is also be a mantra the ECB will be keen to repeat for a while, ensuring their work to date won’t be undone by markets anticipating rate cuts too soon.”DEREK HALPENNY, HEAD OF RESEARCH GLOBAL MARKETS EMEA, MUFG, LONDON:”No big surprises, they are emphasizing that the impact of monetary policy is very clear – the word ‘forceful’ was used. No change in the description of inflation, which means we should get a relatively balanced press conference.””The PEPP guidance is unchanged, we certainly didn’t expect a formal change, and so it’s more about whether there’s a discussion about the balance sheet, and we’ll only know that when someone asks the question in the Q&A.”DEAN TURNER, CHIEF EUROZONE AND UK ECONOMIST, UBS GLOBAL WEALTH MANAGEMENT, LONDON: “The decision by the ECB to keep rates on hold was well flagged, and therefore came as no surprise to investors. Although the messaging in the press release remained largely unchanged, with an ongoing emphasis on data dependency, and the need to ensure that inflation returns to target, it seems clear that the rate hiking cycle is over.”MARCUS BROOKES, CHIEF INVESTMENT OFFICER, QUILTER INVESTORS, LONDON:”It seems… that Christine Lagarde does believe that 4% is the ceiling for rates this time around and should help moderate inflation further, although much of that is out of their control. There remain several risks that may keep inflation stubbornly high, including increasing wage growth and the uncertainty in the Middle East, which is pushing up energy prices. Going forward, like other central banks, it will say the market needs to expect higher interest rates for longer, with the door being left open should we see inflation spike again.””However, given the stagnating economy and the fact other central banks have moved into a holding pattern, something very unexpected would need to happen for rates to be raised again. The pressure will quickly shift to cutting rates given the lack of economic growth. This is the problem facing central banks now.”FRANCESCO PESOLE, FX STRATEGIST, ING, LONDON:”The statement is very similar to the one in September. Obviously, they had to acknowledge the fact that inflation dropped, which was also what they expected but ultimately, they are still trying to hang on to some sort of hawkish bias saying that inflation remains too high.” “There were some expectations they would discuss some changes to PEPP, we’ll see if they mention it in the press conference.”COLIN ASHER, SENIOR ECONOMIST, MIZUHO BANK, LONDON:”The decision/accompanying statement were little changed from the last meeting and very much in line with expectations and hence the market was little changed in the wake of the decision, leaving the U.S. data as the driver.”ARNE PETIMEZAS, SENIOR ANALYST, AFS GROUP, AMSTERDAM:”Before the meeting, speculation was rife that the ECB might increase minimum reserve requirements for banks, or bring forward the start date of quantitative tightening of the pandemic bond portfolio. Neither happened.””The statement was mostly about positive inflation surprises and a further weakening of demand. Thus, we see some relief in bonds.” “I find it disappointing that the ECB didn’t put emphasis on negative growth surprises. PMIs suggest the eurozone is in a recession since the summer. That would be the third time in a row that the ECB continued to raise rates even though the economy was already contracting (2008, 2011, present). And each time, if they had done basic monetary analysis, they would have known that they had over-tightened.” (Reporting the Markets Team; Compiled by Yoruk Bahceli; Editing by Amanda Cooper) More
