ECB distances itself from bets on rate cuts and maintains a tough profile

He European Central Bank (ECB) rejected bets on an imminent interest rate cut on Thursday, reaffirming that funding costs will remain at record highs despite lower inflation expectations.

The president of ECBChristine Lagarde, instead stressed that inflation would pick up soon and that price pressures remain strong, which contrasts with the more pessimistic tone adopted on Wednesday by her counterpart at the US Federal Reserve, Jerome Powell.

“Should we let our guard down? We ask ourselves. No, we must not let our guard down at all“, said Lagarde at a press conference after the decision.

“We have not discussed rate cuts at all. No discussion, no debate”Lagarde said, describing herself as “in COVID recovery mode” and speaking noticeably calmer than usual.

While acknowledging that underlying price pressures were easing, Lagarde said that domestic inflation, driven largely by wage costs in the 20 countries that use the euro, “it’s not moving”.

“We need to better understand what is happening”Lagarde said about wage dynamics, and the extent to which companies will absorb any new wage hikes.

Future risks to inflation in Europe ranged from geopolitical tensions that could drive up energy prices in 2024 to the possibility of extreme weather damaging next year’s food crops.

“Core inflation has moderated further,” the statement said ECB, “but domestic price pressures remain high, mainly due to strong growth in unit labor costs.”

Following Thursday’s decision, the deposit rate of the ECB It remains at a record 4%, which compares to -0.5% in July 2022.

The institution repeated its phrase that “rates will be set at sufficiently restrictive levels as long as necessary”, indicate that the cost of loans is at levels that, maintained “over a sufficiently long period, will contribute substantially to the (inflation) target”.

The comments go against the bets of investors who are betting on interest rate cuts in the first half of next year, which would represent a sharp change of course compared to the sequence of 10 consecutive increases that ended in September.

He ECB It also announced the early end of its latest bond purchase program, ending a decade of debt absorption experiment in the euro zone, made up of 20 countries.

The bank raised interest rates to a record level earlier this year, but unexpectedly benign inflation data in recent months has all but ruled out further tightening of monetary policy, shifting the debate to how quickly it will reverse the course.

Markets are forecasting two cuts before April and 155 basis points of easing in 2024 as a whole, even though a number of conservative monetary policymakers have sought to counter these expectations in the run-up to the December meeting.

He ECB ended its last bond purchase program, the Pandemic Emergency Purchase Program (PEPP), worth 1.7 trillion euros, and announced that it will begin to reduce reinvestments from mid-2024.

According to him ECBthe total reinvestment under the PEPP will end on June 30 and, thereafter, the portfolio will be reduced by €7.5 billion per month until the end of the year.

Previously, all debt cash maturing under the PEPP was due to be reinvested until the end of 2024, but a number of currency leaders have argued that the program has served its purpose, so there was no economic logic behind keeping the end date. original.

It is likely that the doubts of the ECB are due to their reluctance to give up their main instrument for stabilizing markets in case investors put undue pressure on some countries, particularly the indebted nations of the Mediterranean basin.

The ECB could skew PEPP reinvestments towards certain countries and the plan’s demise leaves it with the Transmission Protection Instrument (TPI), an untested bond-buying program that has a high bar. higher for deployment.