ECB Leaves Key Interest Rates Unchanged, Short of Markets Hawkish Expectations

ECB kept key rates unchanged in its January monetary policy decision at 4.50%, multi-year highs for the third consecutive meeting, with the closely watched deposit facility rate 4.00%, in line with markets thoughts. The ECB broke their record streak of rate hikes with the pause and markets are also convinced that they aren’t going to add any more considering the state of the economy at the moment. The ECB’s Lagarde did not push back, failing to make use of Middle East or wage negotiations risks challenging the market’s pricing of cuts. Accordingly, EGBs rallied across the curve in steepening fashion, markets added back some expected cuts by year-end pricing in 22bps in cuts by April and the euro lost ground against all of its peers.

BankofECB

Update: During the press conference, President Lagarde told reporters there was a consensus (note not unanimous as she tends to highlight) that it was premature to discuss rate cuts.

ECB Monetary Policy Decision January 25, 2024

  • 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%

Highlights (Updated with Lagarde press conference)

  • The ECB made minor changes to its statement that were not hawkish. In December, the ECB said that inflation would pick up in the near term, and so it did in December data as was expected. Now, the ECB says that “aside from an energy-related upward base effect on headline inflation, the declining trend in underlying inflation has continued”. The ECB is shrugging off headline inflation noise and seems at peace with how core inflation is evolving.
  • The ECB removed the sentence “domestic price pressures remain elevated, primarily owing to strong growth in unit labor costs.” This may simply be due to this being a non-forecasts meeting, but strong wages growth could have easily been incorporated into the new statement as a caveat to their opinion that “the declining trend in underlying inflation has continued”.
  • Lagarde did note the upside risks to inflation from geopolitical tensions and their influence on energy and freight costs, but she also pointed to the negative confidence effects of global conflicts that could hurt growth.
  • Lagarde did not want to point to a specific data series on compensation or the outcome of wage settlements in coming months as the main thing to evaluate, going as far as highlighting that they’ve seen a slight decline in wage growth. This is in contrast to chief economist Lane, who on the 13th hand-waved that by the April meeting they won’t have the most complete dataset on wages, Q1 national accounts data.
  • Markets had interpreted this as the ECB not being ready to begin easing in April. This remains a key upside risk to inflation, despite Lagarde not making much of wage negotiations specifically.
  • ECB intends to discontinue reinvestments under the PEPP at the end of 2024
Euro Area Interest Rate

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. Policymakers have also pledged to maintain rates at sufficiently restrictive levels for as long as necessary.

ECB Projections December

The staff’s new projections of inflation that incorporate the recent fall in energy prices supported the view that holding firm was needed.

  • 2023 inflation seen at 5.4% (previously 5.6%)
  • 2024 inflation seen at 2.7% (previously 3.2%)
  • 2025 inflation seen at 2.1% (previously 2.1%)
  • 2026 inflation seen at 1.9%

Market Reaction

Amid US data releases and the ECB’s statement and presser, the reaction in markets to the ECB’s communications were taken as dovish.

  • From pre-statement levels, markets have added 13bps in expected ECB rate cuts by December 2024, totaling 142bps from 129bps previously (but we ended 2023 with 165bps priced in). As for the April meeting, there are now 22bps priced in versus 15bps pre-decision (7bps increase), and markets now see a full two cuts (and then some) by June, pricing in 53bps from 42bps prior (11bps increase).
  • German 2yr yields have fallen about 12bps from pre-meeting, to about 2.60% at writing, with 10s down 8bps to 2.28%.
  • The spread of Italian over German 10yr yields has also fallen about 3bps on the communications.
  • The EUR shed about 50 pips versus the USD, from trading around 1.09 this morning to around 1.0850 at writing, on track for a small 0.3% drop on the day vs the USD, and also the GBP where on a EURGBP basis it sits at 0.8525—briefly trading at its lowest point in the cross since August 2023.
  • Note that the release of mixed US data between the publication of the statement and Lagarde’s presser also supported rates markets and weighed on the USD somewhat broadly. US 2s are down 6bps and 10s are down about 4bps from pre-ECB statement levels, and markets added 7bps into year-end Fed pricing that sits at ~140bps.

Full Statement by the ECB 25 December 2024

25 January 2024

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. Aside from an energy-related upward base effect on headline inflation, the declining trend in underlying inflation has continued, and the past interest rate increases keep being transmitted forcefully into financing conditions. Tight financing conditions are dampening demand, and this is helping to 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.

The Governing Council intends to continue to reinvest, in full, the principal payments from maturing securities purchased under the PEPP during the first half of 2024. Over the second half of the year, it intends to reduce the PEPP portfolio by €7.5 billion per month on average. The Governing Council intends to discontinue reinvestments under the PEPP at the end of 2024.

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.

Refinancing operations
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