ECB Expected to Hold Following 10-Consecutive Rate Hikes

Today will see the ECB make their latest interest rate decision, where the general market consensus is projecting that Frankfurt will hold, keeping their benchmark interest rate at 4.5%. The rate decision today follows the 10 consecutive rate hikes that the ECB have conducted since they started their latest tightening cycle in July 2022. With the main refinancing rate at a 22-year high and headline inflation easing to 4.3% across the eurozone, markets will be looking for any forward guidance on how long the central bank may be keeping rates elevated. The ECB have also maintained that they will be keeping the door open to the possibility of further hikes, with such sentiments coming as countries including Italy and Spain seeing their headline level of inflation accelerate to 5.6% and 3.3%, respectively.

During the ECB’s last Policy Meeting on Thursday 14 September, Frankfurt raised rates by 25bps on their main refinancing operations (to 4.5%), marginal lending facility (to 4.75%) and the deposit facility (to 4%). Behind the decision, the ECB citied in their Monetary Policy Statement how “inflation continues to decline but is still expected to remain too high for too long”. Given that these were the exact same words used to open their previous Monetary Policy Statement released on 27 July where the central bank similarly raised rates 25bps, it demonstrates how the ECB continue to face headwinds.

One such headwind is how geopolitical developments have again threatened energy supply-side security, feeding into higher prices. For example, since the ECB’s last meeting, TTF gas futures (the European benchmark) have appreciated from around 36 EUR/MWh to over 50 EUR/MWh. Energy fears have again brought growth concerns sharply into focus.

Regarding growth, ECB policy makers will remain cognisant over the implications that ‘over-tightening’ will have on growth, particularly given the time lag of raising rates and monetary tightening having an impact on the economy. On the subject of growth, data published on the 7 September showed that Eurozone growth continued to stall over Q2 2023. The 0.1% print came well below expectations of 0.3% growth and followed 0.1% contraction over Q4 2022 another marginal 0.1% expansion over Q1 2023. Stagnant growth due to monetary conditions being at their tightest levels since 2008, softened global demand and the geopolitical fall-out from the conflict in Ukraine continue to cause problems for Eurozone growth moving forward. Hence, with dovish ECB members (Panetta, Lane, de Guindos) remaining cautious around the possibility of ‘over-tightening’, dampened growth may see more dovish rhetoric from policy makers.