ECB kept key rates unchanged in its October monetary policy decision at 4.50%, with the closely watched deposit facility rate to 4.00%, in line with markets thoughts. The Euro was largely unchanged with hardly anything new to take away from the statement here. The ECB broke their record streak of rate hikes and markets are also convinced that they aren’t going to add any more considering the state of the economy at the moment. The focus the statement and Lagarde likely to say later on will be to ensure rates are higher for longer now.
Last meeting’s rate hike was most likely the last from the ECB in this cycle, with rates reaching “levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.” The bank’s staff inflation projections last month incorporated the recent run-up in energy prices supported the hawks’ view that more tightening was needed, countering the doves who likely pointed to downward revisions to GDP growth and core inflation forecasts as a reason to hang off with raising rates further.
ECB Monetary Policy Decision October 26, 2023
- Main refinancing rate at 4.50% vs 4.50% prior expected 4.50%
- Deposit facility rate 4.00% vs 4.00% expected Prior4.00%
- Marginal lending facility 4.75% Prior 4.75%
- ECB says that Incoming information has broadly confirmed previous assessment of medium-term inflation outlook.
- Inflation is still expected to stay too high for too long.
- Past interest rate increases continue to be transmitted forcefully into financing conditions
- This is increasingly dampening demand and thereby helps push down inflation
- Key interest rates re at levels that, maintained for a sufficiently long duration, will make a substantial contribution to ensure that inflation returns to its 2% medium-term target in a timely manner
- Future decisions will ensure that policy rates will be set at sufficiently restrictive levels for as long as necessary
- To continue data-dependent approach to determining the appropriate level and duration of restriction
The optionality on more hikes remains, considering the “current” part of the assessment. Recall that this cycle has challenged central banks to come back and do more than they thought months prior. Inflation “is still expected to remain too high for too long”, so more increases cannot be ruled out.
ECB Projections September
- The staff’s new projections of inflation that incorporate the recent run-up in energy prices supported the hawks’ view that more tightening was needed today.
- A convenient leak to Reuters Tuesday night had already readied the upwards revision to the 2024 inflation forecast, which now sits at 3.2% from 3.0% in the June round (2025 lower, at 2.1% from 2.2%).
- Note that the quarterly path still shows two-handled inflation at Q4-24, remaining at the 2.9% pace projected in June.
- The doves (“some” which preferred a pause versus a “solid majority” for a hike, according to Lagarde) likely pointed to negative revisions to GDP growth forecasts as a reason to hold off on raising rates further.
- Growth projections went from 0.9% to 0.7% and 1.5% to 1.0% in 2023 and 2024, respectively.
- 2023 GDP at 0.7% (previously 0.9%)
- 2024 GDP at 1.0% (previously 1.5%)
- 2025 GDP at 1.5% (previously 1.6%)
- 2023 inflation at 5.6% (previously 5.4%)
- 2024 inflation at 3.2% (previously 3.0%)
- 2025 inflation at 2.1% (previously 2.2%)
Full Statement by the ECB 26 October 2023
26 October 2023
The Governing Council today decided to keep the three key ECB interest rates unchanged. The incoming information has broadly confirmed its previous assessment of the medium-term inflation outlook. Inflation is still expected to stay too high for too long, and domestic price pressures remain strong. At the same time, inflation dropped markedly in September, including due to strong base effects, and most measures of underlying inflation have continued to ease. The Governing Council’s past interest rate increases continue to be transmitted forcefully into financing conditions. This is increasingly dampening demand and thereby helps push down inflation.
The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. Based on its current assessment, the Governing Council considers that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal. The Governing Council’s future decisions will ensure that its policy rates will be set at sufficiently restrictive levels for as long as necessary.
The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction. In particular, the Governing Council’s interest rate decisions will be based on its 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.
Key ECB interest rates
The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 4.50%, 4.75% and 4.00% respectively.
Asset purchase programme (APP) and pandemic emergency purchase programme (PEPP)
The APP portfolio is declining at a measured and predictable pace, as the Eurosystem no longer reinvests the principal payments from maturing securities.
As concerns the PEPP, the Governing Council intends to reinvest the principal payments from maturing securities purchased under the programme until at least the end of 2024. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.
The Governing Council will continue applying flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to countering risks to the monetary policy transmission mechanism related to the pandemic.
As banks are repaying the amounts borrowed under the targeted longer-term refinancing operations, the Governing Council will regularly assess how targeted lending operations and their ongoing repayment are contributing to its monetary policy stance.
The Governing Council stands ready to adjust all of its instruments within its mandate to ensure that inflation returns to its 2% target over the medium term and to preserve the smooth functioning of monetary policy transmission. Moreover, the Transmission Protection Instrument is available to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across all euro area countries, thus allowing the Governing Council to more effectively deliver on its price stability mandate.
The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:45 CET today.
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Source: European Central Bank
From The TradersCommunity Research Desk