In this meeting, The European Central Bank (ECB) is anticipated to maintain interest rates steady. ECB extended its rate-hike campaign for a tenth consecutive meeting in September 2023, raising the benchmark deposit facility rate by 25 basis points to a record high of 4%. When the ECB began tightening policy in July 2022, that rate was languishing at a record low of minus 0.5%
"Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target," the European Central Bank stated.
The conundrum that ECB officials had to deal with was that while prices are still growing at a rate that is higher than double the target rate, total economic activity is faltering due to high borrowing costs and a slowdown in China.
The head of the ECB, Christine Lagarde, said interest rates will have to stay high for a while, but she would not completely rule out another increase if necessary. "The focus is going to move to the duration, but that is not to say - because we can't say that now - that we are at peak," she told a press conference.
The ECB's decision is surrounded by a great deal of uncertainty due to the conflicting arguments made by those favoring a further increase because of very high inflation and unsatisfactory disinflation and those advocating for maintaining the status quo because of deterioration in credit supply and demand, delayed effects of monetary tightening, loss of momentum in GDP growth, and deterioration in credit supply and demand.
The end of the rate hike cycle is not yet certain, however, given the still high inflation and the contained economic slowdown at the time of writing.
According to some of the greatest money managers in Europe, traders are mistaken in believing that the European Central Bank has stopped raising interest rates. According to Legal & General Investment Management, Vanguard Asset Management Ltd., and Robeco Group, markets are underestimating the possibility of additional tightening in response. As a net energy importer, the region is particularly vulnerable to rising prices if the Middle East crisis worsens. That leaves short-maturity government bonds particularly vulnerable.
Swaps pricing shows a pause from the ECB virtually baked in this week and only a 10% chance of a 25 basis-point hike at a subsequent meeting.
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