ECB likely to keep interest rate unchanged

October 26, 2023 (MLN): European Central Bank (ECB) policymakers are expected to keep interest rates unchanged at their upcoming meeting in Athens, ending a streak of 10 consecutive interest rate hikes, as APP reported. 

Since July 2022, the ECB has raised rates by 450 basis points to address inflation driven primarily by surging energy prices following Russia's invasion of Ukraine.

This tightening cycle has pushed the key deposit rate to 4%, its highest level in the central bank's history.

While inflation has started to ease, dropping to 4.3% in September from its previous double-digit peak, it remains well above the ECB's target of 2%. The September economic projections from the ECB revised the growth forecast for the eurozone, and geopolitical conflicts, such as the situation in the Middle East, have added to uncertainties.

The ECB is unlikely to consider raising rates further amid rising global economic uncertainty, according to Pictet analyst Frederik Ducrozet. Policymakers are in a "watch and see" mode, with new forecasts expected in December.

Recent economic data has portrayed a pessimistic outlook for the eurozone, with business activity declining in October, raising the possibility of a mild recession in the second half of 2023. Eurozone banks have also tightened their lending criteria for households and businesses, reflecting the impact of higher interest rates on the economy.

ECB President Christine Lagarde has acknowledged the challenges consumers face due to aggressive rate hikes but has cautioned against relenting too soon. While inflation has decreased, the ECB doesn't anticipate it returning to the 2% target before 2025.

Analysts will closely listen to Lagarde's remarks after the rate decision to gauge the ECB's future actions.

Jack Allen-Reynolds of Capital Economics suggests that Lagarde may leave the option of further interest rate hikes on the table. Holding rates at current levels could be presented as a temporary pause, but it could potentially become a plateau.

The question remains how long policy rates should be kept at their current levels, according to Pictet analyst Ducrozet.

The ECB may also discuss the possibility of winding down its balance sheet more rapidly to curb inflation, but this decision will likely be deferred later.

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