The ECB held its latest assessment with no surprises and no clues of immediate shifts. As anticipated, the European Central Bank faced a quiet moment as the euro-area policy rate stayed front and center. President Christine Lagarde stated that the outlook remains positive, yet warned that markets should not lower their guard. A senior French official emphasized that the governing council did not discuss any move toward cutting rates at this meeting, underscoring a cautious stance as 2024 approaches.
Consequently, the policy rate has not changed for a second consecutive meeting. The ECB previously raised borrowing costs at a pace unseen since the euro’s inception in 1999 to tackle persistent inflation, lifting the rate by 4.5 percentage points across ten meetings from mid-2022 to late 2023. The deposit facility — the rate banks earn when they park funds with the central bank — remains at a historical peak of 4.0%. The overarching aim is to keep monetary conditions tight until inflation clearly slows toward the target.
In this context, expectations are the key driver. Latest euro-area data show inflation cooling only gradually. Overall headline inflation stood around 2.4% with core inflation at about 3.6% in November, measured excluding the most volatile energy and food prices. Growth appears soft, with GDP slipping 0.1% in the third quarter. Investors have priced in the possibility of gradual rate reductions next year, with some scenarios suggesting cuts could begin as early as March or April or later in 2024, potentially totaling about 1.5 percentage points across the year. Yet senior ECB officials have urged caution and discouraged premature bets on policy easing.
Inflationary pressures
The monetary authority explained that while inflation has trended lower in recent months, there remains a risk of a delayed pullback when comparing year-over-year data. The withdrawal of fiscal support and the path of consumer prices suggest a slower descent in 2024 than in the current year. Core inflation remains on a moderating track, but domestic factors — notably a rapid rise in unit labor costs — continue to exert upward pressure.
The ECB projects a year-average CPI of 5.4% for the current year, 2.7% next year, 2.1% in 2025, and 1.9% in 2026. Underlying inflation is expected to fall from around 5% to about 2.7% in the same horizon, with subsequent declines to roughly 2.3% and 2.1%. This trajectory is somewhat softer than September projections, yet it still implies that the 2% target will not be achieved quickly. On growth, the central scenario envisions GDP expanding around 0.6% this year and 0.8% next year, trailing earlier forecasts by a small margin, but still signaling a gradual improvement in activity over time.
Additional hardening
Beyond signaling no immediate rate cuts, the ECB is seen as laying groundwork for a slower unwind of its asset purchases. The governing council indicated that from July onward next year, reinvestments of maturing bonds would begin to taper, with monthly purchases under the pandemic-era program reduced to 7.5 billion euros and planned to end at the close of the following year. This gradual step aims to tighten financial conditions by reducing demand for these instruments and help align policy with the evolving inflation outlook.
Lagarde also highlighted a crucial factor for the coming period: information on wage developments and corporate margins will heavily influence the inflation path. The ongoing agreement on wage settlements and the degree to which those settlements translate into higher profits for firms will largely determine the persistence of price pressures. She stressed that domestic inflation has a larger grip on the trajectory than international energy and food prices, underscoring the need to monitor domestic dynamics closely.
Another important message was clarity about the data-driven approach. Lagarde warned against interpreting the policy stance through the lens of past dates. The central bank aims to respond to current data rather than predefined timelines, underscoring the continuum from higher to lower rates only after inflation and growth signals align with the medium-term target. The central bank remains committed to using data as the compass for policy decisions, rather than relying on fixed calendars.