ECB holds benchmark rate at 4%

Athens — The European Central Bank (ECB) left interest rates unchanged as expected on Thursday, snapping an unprecedented streak of 10 consecutive rate hikes while insisting that any talk of rate cuts was premature.

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 be under way. That has boosted market bets that rate hikes are finished and the ECB's next move will be a cut.

ECB president Christine Lagarde told a press conference the eurozone economy was weak but stressed that price pressures remained strong and could be aggravated further if the Middle East conflict pushed energy costs higher.

“We have to be steady. This is the decision of today: We are holding,” Lagarde said, adding that any discussion of where interest rates might go in the future — including speculation about rate cuts — was premature.

“Sometimes inaction is action. A decision to hold is meaningful,” she said, adding that it was taken unanimously.

Speaking in Athens, where ECB policymakers held their meeting for the first time in 15 years, Lagarde said it was clear that the rate hikes put in place so far were having a big impact on the economy, notably in depressing bank lending.

The euro initially dropped against the US dollar before paring some of that decline to last trade down 0.2% at $1.0544. Eurozone bond yields fell, as did the spread between Italian and German 10-year bond yields.

With Thursday’s move, the ECB’s deposit rate stays at a record high 4% while the main rate stands at 4.5%.

The decision to keep rates unchanged is likely to reinforce expectations that the world’s biggest central banks, including the US Federal Reserve, are essentially done tightening policy after an unprecedented series of synchronised 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 were 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.

The outlook for the economy appears to be increasingly precarious, putting a “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.

“The economy is likely to remain weak for the remainder of this year,” said Lagarde. “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.”

Eurozone inflation, which stood at 4.3% in September, is seen easing to about 3.1% in October when preliminary data is released next week. That remains well above the bank’s official inflation target of 2%.

The wording of the ECB’s statement on pandemic emergency purchase programme (PEPP) remained unchanged and the Bank repeated its promise to reinvest all proceeds from maturing debt through the end of 2024.

Lagarde said there had been no discussion of an early reduction of bond holdings in the bank’s €1.7-trillion PEPP.

Some policymakers had publicly said that committing to reinvest proceeds from maturing debt was at odds with the goals of its policy tightening.

The complication is that the ECB uses these reinvestments as its “first line of defence” for vulnerable eurozone economies such as Italy, because it can adjust its purchases of government bonds to insulate them from undue market volatility.

Reuters