On Thursday, the European Central Bank reaffirmed that borrowing costs will continue at record highs despite lower inflation projections, countering wagers on impending interest rate reduction.

The European Central Bank (ECB) did not modify borrowing prices and refrained from mentioning any potential decrease, emphasising that inflation would likely increase and price pressures would still be severe.

“Underlying inflation has eased further,” the ECB said. “But domestic price pressures remain elevated, primarily owing to strong growth in unit labour costs.”

It reiterated, “Rates will be set at sufficiently restrictive levels for as long as necessary.”

These adjustments go against investor expectations that interest rates will be lowered in the first half of the following year, which would be a dramatic break from the ten-month trend of hikes that concluded in September.

A modest shift in policy was the early termination of the European Central Bank’s only remaining bond-buying programme, which was a hangover from the COVID-19 epidemic.

The ECB’s record-high 4% deposit rate is maintained following its decision on Thursday. It just reached a negative 0.5% in July of 2022.

The ECB President Christine Lagarde’s news conference at 1345 GMT will now be the focus of attention.

She has been under pressure to support or renounce her guidance, which stated that rates will remain unchanged for the upcoming few quarters, even though it was issued barely a month ago.

A first rate cut in the spring, maybe as early as March, was what investors were expecting before the meeting. If this happens, the ECB will become the first major central bank to revers its course following a determined attempt to lower inflation since mid-2022.

It was expected that Lagarde would resist bets on rate cuts after the ECB took an entire year and a half to convincingly lower inflation.

The most powerful central bank in the world, the U.S. Federal Reserve, may have made her job more difficult, though, when officials hinted at up to three reductions in borrowing costs late on Wednesday.

Following the announcement, traders reduced their betting on the ECB’s rate reduction, which were previously expected to start in April and total 140 basis points the following year. On Thursday, the bets had reached as high as 160 basis points.

Before the meeting, Reuters polled a small number of economists, and most of them predicted that the first rate cut would occur by June.

Updated economic estimates from the ECB indicated reduced growth and inflation, especially for the upcoming year.

Headline inflation is predicted by ECB staff to average 5.4% in 2023, 2.7% in 2024, 2.1% in 2025, and 1.9% in 2026 of 2026.

The euro zone’s inflation rate was 2.4% in November, but given the recent tax changes and a smaller base of comparison from a year ago, it was anticipated to slightly increase in the upcoming months.

The issue facing Lagarde and the other members of the Governing Council is that the ECB’s forecasts have frequently been inaccurate, most notably in 2021 when the central bank was unable to foresee the sharp increase in inflation.

This makes incoming statistics even more important, especially when it comes to wages, some of which aren’t expected until late April.

Setting the tone last week, influential ECB board member Isabel Schnabel announced that any interest rate hikes were off the table due to a “remarkable” decline in inflation.

It is anticipated that Lagarde would reaffirm Schnabel’s contention that policymakers ought to pay more attention to economic facts and not forecast rates to stay constant until mid-2024.

The European Central Bank (ECB) has made a decision about the continuation of its Pandemic Emergency Purchase Programme, which was introduced at the beginning of the pandemic to stabilise markets and counteract the risk of deflation.

This was supposed to last in full until the end of the next year, but the ECB said that it would merely replace maturing bonds through June and phase out reinvestments in the second part of the year because the markets were now quiet.

(Adapted from BusinessTimes.com.sg)