Instant view: ECB leaves rates at 4%, flags early end to bond buys

LONDON (Reuters) – The European Central Bank left interest rates unchanged as expected on Thursday and signalled an early end to its last remaining bond purchase scheme, which helped support the euro.

The euro held on to the day’s gains, showing little initial reaction to the ECB decision, while German yields, the benchmark for the wider euro zone sovereign debt market, held mostly unchanged.

Global stocks and bond prices had already shot higher, after the U.S. Federal Reserve left rates unchanged the day before and indicated monetary policy tightening was likely over.

European equities, already trading at their highest in nearly two years on Thursday, stood firm

MARKET REACTION:

FOREX: The euro was last up 0.6% on the day at $1.0937 compared with $1.0912 before the decision.

STOCKS: The region-wide traded 1.3% higher, having hit its highest in nearly two years earlier in the day.

MONEY MARKETS: Interest-rate futures showed traders now expect around 148 basis points worth of cuts next year, unchanged from Wednesday’s close but up from around 113 bps at the start of December.

COMMENTS:

CARSTEN BRZESKI, GLOBAL HEAD OF MACRO, ING, FRANKFURT:

“Despite their dismal track record, the ECB’s staff projections will play an increasingly important role again over the coming months. Today’s forecasts show headline inflation at 5.4% in 2023, 2.7% in 2024, 2.1% in 2025 and 1.9% in 2026. GDP growth is expected to come in at 0.6% in 2023, 0.8% for 2024, and 1.5% in both 2025 and 2026. These forecasts would not justify aggressive rate cuts next year.”

“For now, we still think that the ECB’s shift to full dovishness will be more gradual than markets are pricing in. Today’s policy announcements and the staff projections nicely confirm this.”

SAMUEL ZIEF, HEAD OF GLOBAL FX STRATEGY, JP MORGAN PRIVATE BANK, LONDON:

“We’ve been of the mind that the ECB is more likely than not to lead the Fed in this cutting cycle, given the disinflationary process is playing out just as quickly – if not quicker – than in the U.S., while growth is decidedly weaker. But the ECB was unable to ‘out-dove’ yesterday’s pivot by the Fed.”

“The ECB continues to signal that rate hikes are done, but their updated economic projections show no reason to hurry towards less restrictive policy. Core inflation is expected to remain above the Bank’s 2% target through 2026, while growth is expected to pick up from here.”

“We ultimately expect the ECB to shift towards cuts as we move through 2024 along with the Fed. Euro/dollar direction may be a tough call in that environment given uncertainty over which central bank ultimately cuts first.”

DEREK HALPENNY HEAD OF RESEARCH, GLOBAL MARKETS EMEA, MUFG, LONDON:

“The policy decisions themselves were all pretty much in line, I guess it’s down to what extent (ECB chief Christine)Lagarde is willing to push back aggressively on pricing. Our view is that she doesn’t have the justification to do so, so there is some similarity with the Fed, and divergence from the BoE.”

SEEMA SHAH, CHIEF GLOBAL STRATEGIST, PRINCIPAL ASSET MANAGEMENT, LONDON:

“The ECB failed to emulate the Fed today, instead choosing slightly more hawkish wording to its statement. It too is confronted with decelerating inflation, plus it also faces more serious growth challenges than the U.S.”

“Yet the ECB retains enough caution around inflation to tread very carefully around pivot expectations, emphasising the need to keep rates elevated as long as necessary. It will only signal rate cuts once it has sufficient confidence about the future path, likely only a meeting or two before it plans to ease policy. Even so, with a more concerning growth path ahead, the ECB is likely to cut rates ahead of the Fed, not after.”

MARK WALL, CHIEF EUROPEAN ECONOMIST, DEUTSCHE BANK RESEARCH, LONDON:

“Getting the PEPP announcement out of the way now reduces the hurdle to earlier rate cuts in 2024. While the PEPP exit makes it appear like the ECB is not shadowing the Fed’s dovish pivot, it may have subtly opened the door.”

RICHARD CARTER, HEAD OF FIXED INTEREST RESEARCH, QUILTER CHEVIOT, LONDON:

“The ECB has once again held interest rates, and like the Federal Reserve, appears to be at the end of future rate hikes in this cycle, with inflation so close to the magic 2% target.”

“Inflation has been falling consistently in the euro zone and came in at just 2.4% last month, indicating that it was almost ‘job done’ for Christine Lagarde in nursing the economic environment back to normal. But just as rate hikes appear to be at an end, speculation is being fuelled that central banks will now turn to rate cuts in spring next year in order to stimulate growth.”

“Higher for longer will continue to be the message, but in Europe that narrative is likely to be tested to the max and we could easily see it have to pivot first out of all the developed central banks.”

RICHARD GARLAND, CHIEF INVESTMENT STRATEGIST, OMNIS INVESTMENTS, LONDON:

“The ECB was unlikely to change the deposit rate in this meeting, so there are no surprises here, but like the Bank of England they are keen to manage market expectations as to future rate cuts. Recent sharp falls in inflation are making that job harder and at least for now, central banks are being ignored in their efforts to tame market expectations for rate cuts in 2024.”

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