On Thursday local time, the European Central Bank released its latest interest rate resolution, announcing that the three major interest rates would remain unchanged, in line with market expectations, and suspending interest rate hikes for the first time since July 2022, after a cumulative increase of 450 basis points.
At previous meetings, the European Central Bank had strongly hinted that interest rates had peaked, so the market had digested the news of suspending rate hikes. After the resolution was announced, the euro only slightly rose against the US dollar.
The rate hike in September was described as a dove like hike, as the central bank believed that interest rates had reached a "restrictive level". On Thursday, the European Central Bank reiterated this message and stated that its decisions still depend on data. If interest rates remain at the current level for a sufficient period of time, it will make a significant contribution to the timely return of inflation to the target
After more than a year of implementing the most aggressive monetary tightening policy in decades, major central banks around the world are fine-tuning their policies, carefully studying economic data, and examining the impact of early interest rate adjustments.
Like Federal Reserve officials, the European Central Bank has not given up the option of further interest rate hikes, insisting that inflation shocks may prompt them to raise interest rates again. Analysts believe this is an attempt by European Central Bank officials to curb market expectations for rate cuts.
In order to curb the high inflation that troubles both EU businesses and consumers, the European Central Bank has implemented interest rate hikes for 15 consecutive months. The European Central Bank announced that inflation is expected to remain high for a long time, and price pressures continue to exist. However, at the same time, inflation significantly decreased in September, with most core inflation indicators continuing to slow down due to strong base effects.
According to the latest statistics released by the European Bureau of Statistics, the inflation rate in the eurozone has decreased in recent months, but it is still higher than the European Central Bank's 2% target, which is 4.3% as of September.
Although the decrease in energy costs has partially driven inflation back, if winter temperatures significantly decrease, Europe will face higher natural gas demand, and the progress of inflation is not guaranteed to continue.
At the subsequent press conference, European Central Bank President Lagarde stated that the economy remains weak, manufacturing continues to decline, and the impact of high interest rates is expanding.
Lagarde claims that inflation will further decline in the short term, but energy prices are becoming increasingly unpredictable due to geopolitical factors. As for when to cut interest rates, Lagarde mentioned that it is too early to discuss cutting rates, and it is not yet the time to provide forward-looking guidance.
Market perspective
Marcus Brookes, Chief Investment Officer of Quilter Investors, stated that rising energy prices due to salary growth and uncertainty in the Middle East may still lead to a rebound in inflation& Quot; Looking ahead, like other central banks, the European Central Bank has also stated that the market needs to expect interest rates to remain high for a longer period of time, and if inflation surges again, it will still open the door to interest rate hikes& Quot;
However, considering the stagnation of the economy and the fact that other central banks have entered a stagnant mode, some very unexpected things need to happen to raise interest rates again. Given the sluggish economic growth, the pressure will soon shift towards interest rate cuts.
The latest PMI data released this week shows that private sector activity in the eurozone is accelerating its contraction, and the economy is likely to fall into recession. The Eurozone Manufacturing Purchasing Managers' Index (PMI) for October recorded an initial value of 43.0, the lowest in nearly three months.
Dean Na, Chief Economist of UBS Global Wealth Management in the Eurozone and the UK, stated that the decision of the European Central Bank to keep interest rates unchanged has received sufficient attention, so it is not surprising for investors. Although the information in the press conference remained largely unchanged, emphasizing data dependence and the need to ensure inflation returns to its target, it seems clear that the interest rate hike cycle has come to an end.