There is a certain expectation in the markets about a possible and long-awaited development. No interest rate hike in the Eurozone. Analysts agree without hesitation: European Central Bank Governing Council (ECB) will continue this thursday Rates at 4.5% after monetary meeting and deposit interest at 4%. Still, it is expected that president Christine Lagarde’s tone will not soften. Predictions point to a point Harsh message from LagardeHere it is advocated that high rates be left for a longer period of time. If these are met, it will be the first time the ECB has not increased interest rates since July 2022. Therefore, from now on, the attention of the markets will focus on the views of those responsible for monetary policy regarding economic activity, and this will be important in terms of the timing of interest rate cuts. “Right now, markets are assuming: The easing cycle will begin in the second quarter of 2024“This view could be reinforced if the ECB remains pessimistic about economic prospects,” Ebury analysts said.
According to PIMCO portfolio manager Konstantin Veit, the ECB will not change official interest rates because “the monetary policy cycle has reached the following stage: The risks of excessive erection and inadequate erection are more balancedAnnouncing a 0.25 point increase in interest rates at the last monetary policy meeting in September, Lagarde stated that she believes that interest rates have reached levels that “if maintained for a long enough period, will make a significant contribution to inflation returning to the target.” ahead of time. Eurozone CPI fell to 4.3% in September, the lowest level in the last two years. The problem is that in addition to the constant increase in oil prices, there has also been conflict in the Middle East between Israel and Hamas in the Gaza Strip, and they still do not know how this will affect the general course of inflation. . That’s why AXA IM chief economist Gilles Moëc believes: “Any significant change in ECB’s rhetoric will have to wait until the December meetingWe are not convinced that this will be the first time that a new set of forecasts will be presented and even then the Governing Council will have a much clearer picture of the situation.
In an interview with the Greek media ‘Antenna TV’ this Wednesday, the ECB president stated that although the process of reducing inflation to the 2% target is not yet over, he is positive about achieving this target on time. . “We are not finished,” the head of the European export institute summarized, reiterating his commitment to control in the medium term, as price stability is “a mission of the ECB”. “We have to monitor prices and wages, as well as profits, etc., to determine where the risks are,” he explained. “But for now I am confident that we are in the process of bringing inflation back to 2%,” he said. In Athens, where the Governing Council meets this month, Lagarde said those responsible for monetary policy must ensure: “Pay close attention” to potential risks to financial stabilityIncluding a possible escalation of the war between Israel and Hamas that has been raging since October 7.
After a year of increases in interest rates of 0.50 and 0.25 percentage points respectively, the ECB appears to be achieving its goal. Eurozone economy shows signs of broad recession The latest PMI data is lower than the previous month and the contraction in the manufacturing sector continues. Even the services sector, which supported GDP growth at the beginning of the year, recorded its worst performance in almost three years (47.8 in October) and signs of decline are already being felt. Layoffs are already taking place in the manufacturing sector, while overall employment in the Eurozone is heading towards recession. “This data not only shows loss of momentum, but also approaching global economic recession“, explains Nicolas Malagardis, Market Strategist at Natixis IM Solutions. And this set of conditions, together with external factors such as the rise in global government bond yields and geopolitical events, “make strong arguments for the ECB to adopt a cautious stance” to avoid raising rates at the next meeting and Maintain an overall neutral tone.
Analysts also agree on movements around emergency purchase program (PEPP) reinvestments. They believe an early rate cut will be discussed today, but “uncertainty around the reform of eurozone fiscal rules, the recent downward slope of yield curves and the widening of sovereign spreads argue that the eurozone is against any major decision at the next meeting,” says Veit. we keep thinking The decision to end the PEPP cycle will likely be made in December at the earliest“, believes Moëc.
“At a time when budget discussions are ongoing, underpinned by limited fiscal consolidation and optimistic growth forecasts, and there is no prospect of agreement on future fiscal rules for the euro zone, we see little reason for the ECB to touch the first line of defense against fiscal disintegration.” There is no point in adding fuel to the fire and the Executive We believe that his council will remain true to Hippocrates’ oath: “The first thing is to do no harm,” Moëc assumes. In the long term, the ECB’s reinvestment policy will continue in the same way. It will be affected by the structuring of a new operational framework to control short-term interest rates, including the size of the structural bond portfolio. The ECB plans to complete this review in spring 2024.
Finally, the markets Exclusion of the decision on a possible increase in minimum reserves banksThe level of funds they must hold in the accounts they hold at national central banks. The ECB could increase the minimum reserve amount required for financial institutions, which would reduce liquidity and bank lending in the system. Currently the minimum level is 1% of specific liabilities, primarily customer deposits. The euro zone’s national central banks generally pay interest on the minimum reserves held by banks, although they have paid nothing since July 2023. The interest rate paid until October 2022 was based on the interest rate of the main financing operations. It was later reduced to reflect the deposit interest rate and was set at 0% in July 2023.