The Governing Council of the ECB decided today to maintain the three rates unchanged of reference interest. It is the second consecutive pause in the cycle of increases that began in July 2022. The focus is still on inflation which, says the Eurosystem Bank, despite being decreased in recent months, “will probably return to record a temporary increase in the short term” says the ECB. The objective remains that of bringing it back to 2% and to achieve this objective, the ECB continues to say, the Governing Council will ensure that the rates of reference are set “on levels sufficiently restrictive as long as necessary”. Frankfurt is moving in the wake of the Fed, but unlike the US central bank it is not evaluating possible reductions. “We didn't talk about rate cuts at all”: said the president of the ECB, Christine Lagarde, at the end of the Governing Council meeting.
The reference rates on the main refinancing operations, marginal lending facility and deposits with the central bank will remain unchanged at 4,50%, 4,75% and 4,00% respectively.
Inflation estimates revised downwards
Furthermore, today the ECB staff made their decisions known quarterly projections on inflation by reviewing them at fall for this year, but above all for the next, compared to the estimates formulated in September, foreseeing an early rapprochement with 2% threshold considered optimal for the markets and the economy. In particular, Eurosystem experts expect overall inflation to stand on average at 5,4% in 2023 (it was seen at 5,6% in September), to 2,7% in 2024 (from 3,2% ), to 2,1% in 2025 and 1,9% in 2026.
What is still pushing prices?
Inflation background recorded a further increase flexion, says the ECB. But she internal pressures on prices remain high, mainly due to the strong growth of cost of labor per unit of product. Eurosystem experts expect inflation net of the energy and food component to average 5,0% in 2023, 2,7% in 2024, 2,3% in 2025 and 2,1 % in 2026.
Economic growth revised down compared to September
as to economic growth, Eurosystem experts expect economic growth to remain contained in the short term, but subsequently, says the ECB, the economy should record a recovery due to the increase in real incomes – as families benefit from falling inflation and rising wages – and from improving external demand. Therefore, the projections of Eurosystem experts indicate an increase in growth from an average of 0,6% in 2023 (estimate revised downwards from that of September of +0,7%) to 0,8% in 2024 (from + 1%) and 1,5% in both 2025 and 2026.
The ECB's future moves: everything will depend on the data
The Governing Council will continue to follow one approach data driven in determining the appropriate level and duration of restriction. In particular, decisions on interest rates will be based on its assessment of inflation outlook, considering the most recent economic and financial data, the dynamics of underlying inflation and the intensity of monetary policy transmission.
Pepp program: will end by 2024
Today the Governing Council also decided to bring back to normal the Eurosystem budget and in particular the pandemic emergency purchase programme, PEPP). While on the one hand the ECB will continue to reinvest, in full, the capital repaid on the securities maturing in the first part of 2024. On the other hand, the ECB has announced that in the second part of 2024 it will begin to reduce the PEPP portfolio by 7,5 billion of euros per month, on average, e end investments at the end of the 2024. As for the APP's portfolio, it is shrinking at a measured and predictable pace given that the Eurosystem no longer reinvests the capital repaid on maturing securities.
The moves today also by Boe and Bns, yesterday by the Fed
This morning too Bank of England he stood his ground and said UK interest rates will need to remain high for “a prolonged period”. The BoE's Monetary Policy Committee voted to keep rates at their highest level in 15 years of 5,25%, in line with economists' expectations in a Reuters poll last week. Also there Swiss Central Bank (SNB) Meanwhile, it leaves rates unchanged at 1,75%. The decision confirms expectations.
Yesterday as expected Federal Reserve kept interest rates unchanged, for the third consecutive time at 5,25-5,5%, signaling the possibility of three cuts in 2024.
The market reaction
European stock markets remain positive after the ECB's decision. The Dax gains 0,61%, the Cac40 1,19%, the Ftse100 1,59%. Instead, the Ftse Mib limited itself to a progress of 0,37% at 30.408 points in the early afternoon, held back above all by the banks which could be penalized by a future drop in rates: Mps lost 4,93%, Banco Bpm 4,71, 6,49%, Bper Banca 3,84% and Unicredit XNUMX%.
The BTP/Bund spread goes below 170 to 164 bps and the yield on the 10-year BTP drops to 3,77%. The yield on the 3,95-year US Treasury also fell to 10%.
