ECB keeps interest rates unchanged, sticks to data-dependent approach

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As expected, the European Central Bank kept rates unchanged at its January meeting, despite growing calls for monetary easing.

ANNOUNCEMENT

The European Central Bank (ECB) has announced that it will keep key interest rates stable. The decision taken during the January political meeting was widely expected. The main refinancing rate will remain at 4.50%, with the rates for the marginal lending facility and the deposit facility at 4.75% and 4.00% respectively. The decision underlines the ECB’s cautious approach in a context of economic uncertainties.

Stability was also found in the ECB’s asset strategies, as no adjustments were made to the Asset Purchase Program (APP) and the Pandemic Emergency Purchase Program (PEPP). APP’s portfolio is expected to decline at a constant rate, without any reinvestment of maturing securities. The PEPP, however, is preparing for a gradual reduction to an average of 7.5 billion euros per month, starting from the second half of 2024, with the complete elimination of reinvestments by the end of the year.

The ECB’s official statement highlighted that “the downward trend in underlying inflation has continued”, attributing this trend to the dampening effect of high-cost capital on demand, which in turn mitigates inflationary pressures.

December saw a slight increase in Eurozone inflation to 2.9% year-on-year, compared to November’s two-year low of 2.4%. The increase, attributed mainly to fluctuations in energy prices, marked the first increase in inflation since April 2023.

Regarding inflation, the ECB remains data-dependent

The ECB’s Governing Council is determined to bring inflation back to the medium-term target of 2% and has stated that interest rates must remain sufficiently restrictive to achieve this objective.

Therefore, the ECB has not signaled any imminent easing of monetary policy, underlining its satisfaction with the prevailing interest rate levels.

The ECB’s policy trajectory remains firmly data-dependent, promising to adapt the level and duration of monetary tightening based on new economic indicators.

This stance comes against a backdrop of contracting private sector activity within the eurozone, as January flash HCOB PMI estimates fell short of expectations, painting a picture of an economy facing headwinds .

“THE euro area economy it is likely to have remained stagnant in the last quarter of 23. Incoming data continues to point to weakness in the short term,” Lagarde said in her opening speech.

For now, the message is clear: Stability is key as the ECB navigates the choppy waters of a weakened economy with the enduring goal of price stability.

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