No surprises: the ECB decides to keep interest rates unchanged

The Governing Council of European Central Bank(ECB) announced its decision to keep the three key official interest rates.

The interest rate on the main financing operations remains at 4.50%, while the interest rates on the marginal credit facility and the deposit facility remain stable at 4.75% and 4.00%, respectively.

In his statement, The ECB reaffirms its commitment to bring euro zone inflation back to its 2% target in the medium term. The Governing Council considers that current interest rates, if maintained for a sufficient period, will contribute significantly to this objective. Besides, is committed to maintaining restrictive levels in official interest rates for as long as necessary.

The ECB continues to take a data-driven approach to determining the appropriate level of restriction and its duration. Decisions about interest rates are based in assessing inflation prospectsconsidering new economic and financial data, the dynamics of underlying inflation and the transmission of monetary policy.

In relation to the Pandemic Emergency Purchase Program (PEPP), The ECB reiterates its intention to reinvest the principal of the securities acquired under this program that mature, at least, until the end of 2024. The ECB will manage the eventual extinction of the PEPP portfolio to avoid interference in monetary policy.

The ECB statement does not reveal significant changes in its liquidity programs for the financial sector. The Governing Council regularly assesses how targeted longer-term refinancing operations and their current repayments contribute to the direction of monetary policy as credit institutions repay amounts obtained.

Interest rates: what the market expected

So, about interest rates, The market was anticipating a “pause” in the adjustment during the meeting that the European Central Bank (ECB) will hold this Thursday in Athensinstead of its usual location in Frankfurt.

Although eliminating the possibility of a future increase in interest rates is of great importance, both in the tone of the statement and in Lagarde’s subsequent statements, There is an issue that currently worries the market significantly.

The great uncertainty lies How long will interest rates in the eurozone remain as high as they currently are? after experiencing ten increases in the last 14 months from the negative levels they were at. These levels had placed the cost of borrowing at 4.5% among the countries that share the single currency.

This question is what most intrigues financial markets at the moment. According to a Reuters poll, interest rates in the eurozone are considered unlikely to increase in the current monetary policy environment.

However, the worrying part is that, according to the majority of economists consulted by the agency, interest rates will not begin to decline from their current levels, at least until July 2024. This is due to the ECB’s persistent fight against inflation, which is far from resolved.

Specifically, 58% of respondents estimate that the first interest rate reduction will occur in the third quarter of 2024 or later, and the deposit rate, currently at 4%, is expected to remain at 3.5% end of September next year.