As expected, the ECB’s Governing Council (GC) today left unchanged its three key policy rates. The decision to hold rates was “unanimous”.
There were no new announcements. Of particular note, the possibility of accelerating ‘normalisation’ of the ECB’s balance sheet was not discussed.
The ECB maintained its view that inflation “is still expected to stay too high for too long, and domestic price pressures remain strong”. Higher-for-longer rhetoric was also left unchanged, with the GC stating that it “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 GC’s future decisions will ensure that its policy rates will be set at sufficiently restrictive levels for as long as necessary.”
When asked about how long is “sufficiently long”, ECB president Christine Lagarde replied that “we shall be data dependent”, adding that “after 10 successive hikes, now is not the time for forward guidance”. Lagarde also pushed back on any discussion regarding rate cut(s), saying “this was not discussed at all and the debate would be absolutely premature”. She even kept the door open for further rate hike(s) by saying that “the fact that we are holding doesn’t mean to say that we will never hike again”.
On the three main topics we highlighted in our preview earlier this week, there were no surprises. The GC’s economic assessment remained broadly unchanged. Growth remains weak and risks are tilted to the downside due to fading global growth, policy transmission and geopolitical risks. But, falling inflation still creates scope for some pickup in consumer spending, while exports should provide more support. The ECB also noted signs of weaker job creation, while most measures of underlying inflation were continuing to decline. Monetary policy transmission in the monetary union indeed remains pretty forceful, as shown by the decrease in lending volumes, the tightening in credit standards and the increase in borrowing rates over the past months.
When asked about rising bond yields in Europe, Lagarde stressed that “this was not related to the fundamentals of the euro area but originates from abroad”. The two ways to speed up reduction of the ECB’s balance sheet (selling bonds from its APP programme or stopping its PEPP reinvestments) were not brought up today. The GC continues to intend “to reinvest the principal payments from maturing securities purchased under the programme until at least the end of 2024”. Lagarde mentioned that “neither the PEPP nor reserve remuneration were discussed at this meeting”. On widening spreads on peripheral (especially Italian debt), she said that “the ECB has all the adequate tools to ensure the transmission of monetary policy”.
In all, this meeting was all about taking stock, with the ECB showing little appetite to “rock the boat”. Following today’s meeting, we continue to believe that the ECB is done with rate tightening. The ECB will concentrate on determining how long rates need to stay at current levels for inflation to return to target and on normalisation of its balance sheet.
