The European Central Bank complies with the script that the markets expected and maintains interest rates. In its monetary policy meeting this Thursday, the entity chaired by Christine Lagarde leaves the main reference at 4.50%. The pause lengthens the brake on the rate increase that the entity decided in October, after ten consecutive increases to try to tame skyrocketing inflation.
In the statement after the Council meeting there is no detail about future cuts. We have to wait for Lagarde’s press conference to look for clues in her speech about reductions in 2024. The downward path of inflation from the highs after the outbreak of the war in Ukraine removes arguments for raising rates, but does not give them even to lower them by continuing at levels higher than the ECB’s 2% target, especially in the underlying. “Inflation is expected to decline gradually over the next year and to approach the Governing Council’s target of 2% in 2025,” the statement said.
Inflation in the euro zone has been moderating from the 10.1% year-on-year rate seen in November of last year to the current 2.4%. Prices have fallen without interruption since May and the energy component is no longer a burden. If a year ago it rose 35%, today it has fallen 11.5%. The problem is that it has been infecting the rest of the products, and today food prices continue with notable increases, of 6.4% among fresh products. A still high underlying and the fact that the 2% objective pursued by the entity is still far away lead us to choose to maintain things. “Core inflation has continued to moderate, but domestic inflationary pressures remain intense, mainly due to strong growth in unit labor costs,” argues the ECB.
In any case, the Frankfurt-based entity points out that its strategy is working. “Previous interest rate increases continue to be strongly transmitted to the economy. Tightening financing conditions are curbing demand, which is helping to reduce inflation.” The danger is to over-brake and take the economy into recession, although now there is more talk of a soft landing.
The panorama is similar to that observed in the US, where the Federal Reserve decided this Wednesday to maintain rates in the range of 5.25%-5.5% and draw a scenario of three reductions in 2024, of the environment three-quarter point as a whole. The stock markets celebrate the direction: a decrease in rates turns their sights to equities, since fixed income begins to be placed at lower rates and loses attractiveness over other alternatives that can offer higher returns, such as parquets.
The perspective with which the market works is that the peak in rates has been assumed and that a stage of stability is now being entered to see reductions throughout 2024. All, of course, linked to the decrease in inflation or the landing of the economy.
The ECB appointment was not the only one marked on the calendar this Thursday. In England, the central bank has kept rates at 5.25% and ventures that they will remain high for “a long period.” For its part, the Swiss National Bank has left the reference rate at 1.75%.
