The European Central Bank opted to keep interest rates unchanged in an expected decision on Thursday.
The rates will remain at 4.5% for main refinancing operations, 4.75% for the marginal lending facility and 4% for the deposit facility, where they have sat since September. In the monetary policy statement, the European Central Bank reiterated its goal of achieving 2% inflation.
As of December, inflation hit 2.9%, with food price inflation at 6.1% and services inflation at 4%.
Shane O’Neill, head of interest rates at Validus Risk Management, said: “Going into the meeting, the markets were expecting approximately 145bps of cuts this year from the ECB. Following the meeting, these cuts have been pared back to 137bps and, in our opinion, this pricing is still too dovish.
“Though the economy is likely to have ‘stagnated’ in the fourth quarter and demand in the labour market is beginning to wane, inflation remains above target and the ECB is resolute in its messaging – this is objective number one.”
O’Neill also remained wary of how geopolitical conflict could shift this dynamic, a concern also listed by the monetary policy statement’s risk assessment particularly for Ukraine and the Middle East.
“A complicating factor in the fight against inflation is the continued geopolitical turbulence in the Middle East – particularly the issues in the Red Sea,” O’Neill said.
“These developments have already seen shipping costs into Europe increase dramatically, an effect which will feed through into prices and add to inflationary pressures. Lagarde once again told markets that the ECB will remain data driven in its decisions, it will not want to cut rates too quickly at the risk of an inflation double header.”
Anna Stupnytska, global macro economist at Fidelity International, felt the guidance was ‘slightly more optimistic’ on what could affect price.
“As expected, in the press conference, President Lagarde pushed against market expectations of earlier cuts (April), stressing the ECB remains data dependent, not date dependent, and the rate cut debate remains ‘premature’.
“The summer timeline is partly guided by data on negotiated wages which will only be available in full in late April, in time for June’s meeting. Lagarde said they are seeing some stabilisation in their wage tracker, but more data is needed for a full picture – the ECB is prepared to wait for more information before moving the debate towards easing.”
The European Central Bank listed the unemployment rate for November at 6.4%, however they noted that demand is now diminishing with less advertisement of vacancies.
Daniele Antonucci, CIO at Quintet Private Bank, said: “Market expectations for eurozone economic growth continue to come down, after a slew of weak data. Inflation too is moderating, but wage growth and, crucially, wage demands, could still keep it more elevated than policymakers’ comfort zone.
“Potential disruptions to supply chains, partly related to tensions on the Red Sea, add a layer of extra uncertainty. This is why we think market expectations of rate reductions as soon the next one or two policy meetings are probably excessively optimistic.
“We think the European Central Bank’s reaction function is likely to be one where it waits for somewhat longer, to ensure that the outlook for inflation gets clearer. The path for interest rates of the next six to 12 months, though, still points to lower rates.”