The European Central Bank (ECB) has decided to keep its deposit rate steady at a record high of 4% for the second consecutive meeting, in line with the expectations of economists surveyed by Bloomberg. This decision comes amid a backdrop of decreasing inflation rates, with the ECB projecting a gradual decline in consumer-price growth towards their 2% target. Despite holding rates, the ECB announced an acceleration in winding down the Pandemic Emergency Purchase Programme (PEPP) bond-buying program, signaling a continued shift towards policy tightening.
ECB President Christine Lagarde noted that while economic growth risks remain tilted downwards, the inflation outlook is more balanced. This stance is reflected in the ECB’s latest economic projections, which forecast inflation rates of 2.7% for next year and 2.1% for 2025. The euro and German bonds saw modest reactions to the announcement, while Italian bond yields decreased slightly.
Investors have adjusted their expectations for future ECB rate cuts, now anticipating approximately 155 basis points of easing, a slight decrease from prior expectations. The ECB emphasized its commitment to maintaining sufficiently restrictive policy rates until it is necessary to achieve their inflation target. The ECB’s approach contrasts with the Federal Reserve and the Bank of England, which are also navigating similar economic conditions but have signaled different policy responses.
The ECB’s decision to phase out the PEPP reinvestments by the end of 2024 will reduce its capacity to address bond market tensions across the Eurozone. However, this move aligns with the desire of several ECB officials to avoid sending mixed messages to the market. The focus now shifts to wage negotiations and their potential impact on inflation, with the ECB closely monitoring these developments amidst a milder than expected economic downturn.
