The European Central Bank (ECB) left interest rates unchanged for the first time in more than a year as it gauges whether an unprecedented series of hikes will succeed in subduing inflation.
Following last month’s knife-edge decision to lift the deposit rate to a record 4 percent, policymakers kept it there yesterday — matching the predictions of all economists surveyed by Bloomberg.
They reiterated in a statement that holding borrowing costs at that level for long enough will make a “substantial contribution” to bringing consumer price gains back to the 2 percent target.
Photo: Bloomberg
Speaking in Athens, where the Governing Council gathered for one of its regular meetings beyond the ECB’s Frankfurt headquarters, President Christine Lagarde said “we have to be steady.”
“Having a discussion on cuts is totally, totally premature,” she told reporters, reiterating her position from last month’s meeting. “The fact that we are holding doesn’t mean to say that we will never hike again.”
The euro held losses against the US dollar, while German bonds edged higher. Italian bonds, which have been a major beneficiary of ECB debt-buying programs, outperformed as Lagarde said changes to the 1.7 trillion euro (US$1.8 trillion) pandemic-era Public Sector Purchase Program (PEPP) initiative weren’t discussed this week.
Like its peers in the US and the UK, the ECB hasn’t shut the door to further hikes, should inflation fail to ease quickly enough. But there is little doubt among economists and investors that the high point for eurozone borrowing costs has been reached following 10 back-to-back moves starting in July last year.
ECB officials aren’t offering many clues, with several focusing instead on other policy levers like PEPP. Tweaks there could prove controversial, though, as Middle East tensions threaten to push oil prices higher, Italy’s government finances worry investors and the euro area’s economy wobbles amid higher credit costs.
“As is often the case with monetary policy, there is this transmission lifetime,” Lagarde said. “The assessment by our staff is that there is still more in the pipeline, and more to come to affect the real economy. And the assumption is that it will continue to unfold throughout the end of 2023 and first quarter of 2024.”
The ECB’s announcement is part of a slew of global rate meetings. On Wednesday, the Bank of Canada kept rates unchanged for a second straight time, while leaving open the possibility of more tightening. Next week will feature decisions by the US Federal Reserve and the Bank of England. Both are expected to hold fire.
Lagarde warned that growth risks remain skewed to the downside.
“The economy is likely to remain weak for the rest of this year,” she said. “But as inflation falls, further household real incomes recover and the demand for euro-area exports picks up, the economy should strengthen over the coming years.”
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