For the first time in 11 consecutive meetings of its Governing Council, the European Central Bank (ECB) elected not to raise any of its key interest rates.
The decision was unanimous and was communicated as a “hold”, as opposed to a “pause”, leaving the market speculating as to whether the next move will be an increase or a decrease. ECB President, Christine Lagarde, addressed this to an extent by saying that she would not “pass a judgement to say we are at peak”, whilst also being very firm in stating that “even having a discussion on a (rate) cut is totally, totally premature”. This outcome was largely in line with market expectations, with no hikes priced going into the meeting. The initial market reaction was remarkedly muted for an ECB decision day, with yields across most of European government bond markets falling by around five basis points, with shorter-dated bonds outperforming longer-dated bonds.
Whilst the overwhelming consensus prior to the meeting was for rates to be kept on hold, there was speculation in the market as to whether the ECB would elect to cut short its commitment to reinvesting the maturity proceeds of bonds bought under its Pandemic Emergency Purchase Program (PEPP), which had been skewed towards the buying of bonds issued by peripheral European Governments. The rationale for this was that continuing to re-invest in these markets was somewhat at odds with the tightening of financial conditions, engineered by the 10 previous rate hikes. In the event, the commitment to continue re-investing maturing proceeds from the PEPP bonds until at least the end of 2024 remained intact. Moreover, in the press conference following the statement, Madame Lagarde was unequivocal, saying that changes to the PEPP program were not even discussed at the meeting.
The decision to make no changes to any of the policies at this meeting should really have come as no surprise. Over recent weeks, incoming economic data has shown signs of weakness, indicating that the tightening of financial conditions to date are continuing to have the desired effect, though Madame Lagarde was at pains to stress that the ECB remains fully committed to achieving its price stability target of 2% inflation over the medium term. Notwithstanding this, Madame Lagarde pointed out that risks to growth remain to the downside, particularly should the current situation in the Middle East escalate. She also called upon national governments to assist in the battle against inflation by removing fiscal support programs implemented to support citizens during last year’s energy crisis, as energy prices have fallen from their peak.
With the ECB reaffirming its data dependence stance, we expect the market to continue to try to second guess its next move as economic data is published. This in turn will serve to keep volatility elevated, particularly so, in an environment of continued geopolitical uncertainty. At the next meeting of the Governing Council on 14 December, it will have access to revised ECB staff forecasts, so expectations for more affirmative action will undoubtedly increase over the next few weeks.
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