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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The European Central Bank has kept interest rates unchanged, bringing an end to its unprecedented streak of 10 consecutive increases in borrowing costs. The decision, which was announced after ECB rate-setters gathered in Athens for their annual meeting outside of the bank’s Frankfurt headquarters, was expected by analysts after eurozone inflation more than halved from its peak and the economy showed signs of weakening. The benchmark deposit rate is now 4 per cent — four-and-a-half percentage points above its all-time low of minus 0.5 per cent. The ECB’s pause follows the Bank of Canada’s decision to hold its main interest rate at 5 per cent yesterday, and comes ahead of expected holds by the US Federal Reserve and Bank of England next week.The decisions underline how major central banks appear to judge they are close to having done enough to tame inflation.Rate-setters must now assess how long rates need to stay high to return inflation to their targets of 2 per cent. In the eurozone, meanwhile, concerns over the weakness of the economy are mounting, with analysts expecting GDP figures for the third quarter, out next week, to show a contraction in output. The ECB said in its statement that inflation was “expected to stay too high for too long, and domestic price pressures remain strong”, but it added that the impact of its earlier rate rises was “dampening demand and thereby helps push down inflation”.ECB president Christine Lagarde, who is now holding a press conference, is expected to face questions on what the conflict between Israel and Hamas could mean for energy prices and whether the eurozone economy may contract in the second half of this year.Oil prices remain slightly below where they were at the last ECB meeting six weeks ago, despite fears war could spread through the Middle East. However, European natural gas prices have climbed about a third in that time amid worries about supply disruptions.Eurozone inflation has dropped from a peak of 10.6 per cent a year ago to 4.3 per cent in September. Some economists think it could fall close to 3 per cent when October price data is published on Tuesday.The ECB said keeping rates at their current level “for a sufficiently long duration will make a substantial contribution” to achieving its inflation target. It added that “rates will be set at sufficiently restrictive levels for as long as necessary”.The eurozone economy has achieved at best tepid growth for the past three quarters, as higher borrowing costs have squeezed activity. Economists have been cutting their forecasts for the remaining two quarters of the year and warning of a potential recession after this week’s survey of purchasing managers and data on bank lending pointed to a sharper contraction than anticipated.The weakness in the economy is expected to put more strain on the hitherto resilient labour market and add downward pressure to prices.“The bar for resumed hiking appears relatively high,” said Paul Hollingsworth, chief economist for Europe at French bank BNP Paribas, adding that growth and inflation in the eurozone were “on track to be in line with, if not weaker than” the ECB’s own projections. The ECB expects no growth in the third quarter, with inflation averaging 5 per cent. Financial markets largely brushed off the pause, with stock markets stuck in negative territory and government bond yields stable.The region-wide Stoxx Europe 600 remained 0.8 per cent lower in early afternoon trade, with France’s Cac 40 and Germany’s Dax stuck 0.7 per cent and 1.3 per cent lower on the day. The yield on 10-year German Bunds fell 0.01 percentage points to 2.87 per cent, while the yield on Italy’s 10-year bond was down 0.02 percentage points at 4.89 per cent. The euro barely budged against the dollar, down 0.3 per cent.Additional reporting by George Steer More

ATHENS (Reuters) -The European Central Bank left interest rates unchanged as expected on Thursday, 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.Looking to keep all of its options open, the ECB said it would follow a “data-dependent” approach and decisions would be based on incoming data. “The key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to (the inflation) goal,” the bank said in a statement after meeting in Athens for the first time in 15 years. “Future decisions will ensure that its policy rates will be set at sufficiently restrictive levels for as long as necessary,” the ECB said.The decision to keep rates unchanged is likely to reinforce expectations that the world’s biggest central banks, including the U.S. Federal Reserve, are essentially done tightening policy, ending an unprecedented series of synchronized 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. The outlook for the economy appears to be increasingly precarious, putting a so-called “soft landing” in jeopardy.Industry is in recession, sentiment indicators are pointing south, consumption is muted and even the labour market has started to soften, all suggesting a contraction in the second half of 2023. With Thursday’s decision, the ECB’s deposit rate stays at a record high 4% while the main rate stands at 4.5%.BOND PORTFOLIO REDUCTION? Attention will now turn to ECB President Christine Lagarde’s 1245 GMT news conference. She is likely to asked whether policymakers discussed an early reduction of bond holdings in the bank’s 1.7 trillion euro ($1.8 trillion) Pandemic Emergency Purchase Programme.The wording of the ECB’s statement on PEPP 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 euro zone 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. ($1 = 0.9457 euros) More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Turkey has raised interest rates for the fifth time since June as the country steps up its battle against inflation and the threat of escalating conflict in the Middle East poses a fresh challenge to policymakers. The central bank on Thursday increased the benchmark one-week repo rate by 5 percentage points to 35 per cent, matching the expectation of economists in a Reuters poll.The big rate rise is the latest sign of how Turkey has sharply pivoted its economic policy since President Recep Tayyip Erdoğan was re-elected in May. Central bank chief Hafize Gaye Erkan has vowed since her appointment in June to tighten monetary policy as much as is necessary to cool inflation, which is running at more than 60 per cent. “Monetary tightening will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in inflation outlook is achieved,” the central bank said, as it warned that “geopolitical developments pose risks to the inflation outlook” if they led to higher oil prices.The price of international crude benchmark Brent has jumped nearly 20 per cent to $88 a barrel since the start of June. Production and export cuts by Saudi Arabia and Russia have partly driven the rally. But analysts also fear that any broadening of the Israel-Hamas war into a wider regional conflict will send prices even higher. Turkey imports the bulk of its energy and, in addition to boosting inflation, higher oil prices will make it more difficult for the government to achieve its goal of narrowing the country’s massive current account deficit. “The central bank’s policy tightening and its recent communications have helped to rebuild its credibility and generate confidence that it is taking a more serious stance against inflation,” said Liam Peach, senior emerging markets economist analyst at Capital Economics.Erkan’s central bank has more than quadrupled the one-week repo rate since June in an attempt to rein in inflation, which has been fuelled both by overheating domestic demand and elevated energy prices. The higher-rate policy marks a stark contrast to Erdoğan’s long-held insistence that borrowing costs should be kept at low levels despite a prolonged period of high inflation. Erdoğan in September publicly embraced tight monetary policy, something that has helped to ease scepticism that the Turkish president will change course ahead of next year’s local elections in which his Justice and Development party will attempt to take back control of the country’s biggest city, Istanbul. A central bank poll before Thursday’s rate decision showed Turkish investors and business leaders expected the one-week repo rate to be 39 per cent a year from now, highlighting how the local business community is braced for a long period of high borrowing costs. Higher rates are part of a broader economic overhaul that is being led by finance minister Mehmet Şimşek, who was appointed in June. The government has boosted taxes, taken a series of actions to slow consumer and commercial lending growth and allowed the lira to fluctuate more freely after curtailing a costly programme to prop it up. Foreign investors, who fled Turkey after years of unorthodox economic policies, have broadly taken an upbeat view on the new programme even if they remain sceptical about how much leeway policymakers will have ahead of next year’s municipal elections. Investors are also paying keen attention to Erdoğan’s response to the Israel-Hamas conflict. The Turkish president has stepped up his rhetoric against the Jewish state and its western allies in recent days. Turkish stocks fell sharply on Wednesday after he said Hamas, whose militants killed at least 1,400 people in its October 7 attack on Israel, was not a terrorist organisation but rather a “group for liberation”.Helping to counterbalance those concerns was Erdoğan’s decision this week to send Sweden’s request for accession to Nato to Turkey’s parliament. The US and Europe have both been pushing Ankara to ratify Sweden’s accession into the military alliance. More