Price pressures are lastly easing and inflation has greater than halved in a 12 months, whereas the economic system has slowed a lot {that a} recession could also be below method. That has boosted market bets that price hikes are completed and the ECB’s subsequent transfer might be a minimize.

ECB President Christine Lagarde informed a press convention the euro zone economic system was weak however pressured that worth pressures remained sturdy and could possibly be aggravated additional if the Middle East battle pushed power prices larger.

“We have to be steady. This is the decision of today: We are holding,” Lagarde mentioned, including that any dialogue of the place rates of interest would possibly go sooner or later – together with hypothesis about price cuts – was untimely.

“Sometimes inaction is action. A decision to hold is meaningful,” she mentioned, including that it was taken unanimously.

Speaking in Athens, the place ECB policymakers held their assembly for the primary time in 15 years, Lagarde mentioned it was clear that the speed hikes put in place to date had been having a huge impact on the economic system, notably in miserable financial institution lending.

The euro initially dropped towards the U.S. greenback earlier than paring a few of that decline to final commerce down 0.2% at $1.0544. Euro zone bond yields fell, as did the unfold between Italian and German 10-year bond yields.

With Thursday’s transfer, the ECB’s deposit price stays at a document excessive 4% whereas the primary price stands at 4.5%.

The resolution to maintain charges unchanged is prone to reinforce expectations that the world’s greatest central banks, together with the U.S. Federal Reserve, are primarily finished tightening coverage after an unprecedented collection of synchronized hikes.

That is prone to shift market focus to simply how lengthy charges want to remain at their present highs, a tough train as traders had been betting on the subsequent ECB transfer to be a minimize as quickly as June, with two full strikes priced in by subsequent October, a timeline some policymakers think about unrealistic.

The outlook for the economic system seems to be more and more precarious, placing a so-called “soft landing” in jeopardy.

Industry is in recession, sentiment indicators are pointing south, consumption is muted and even the labour market has began to melt, all suggesting a contraction within the second half of 2023.

“The economy is likely to remain weak for the remainder of this year,” mentioned Lagarde. “But as inflation falls further, household real incomes recover and the demand for euro area exports picks up, the economy should strengthen over the coming years.”

Euro zone inflation, which stood at 4.3% in September, is seen easing to round 3.1% in October when preliminary knowledge are launched subsequent week. That stays effectively above the financial institution’s official inflation goal of two%.

NO TALK OF BOND PORTFOLIO REDUCTION

The wording of the ECB’s assertion on PEPP remained unchanged and the financial institution repeated its promise to reinvest all proceeds from maturing debt by way of the top of 2024.

Lagarde mentioned there had been no dialogue of an early discount of bond holdings within the financial institution’s 1.7 trillion euro ($1.8 trillion) Pandemic Emergency Purchase Programme.

Some policymakers had publicly mentioned that committing to reinvest proceeds from maturing debt was at odds with the objectives of its coverage tightening.

The complication is that the ECB makes use of these reinvestments as its “first line of defence” for weak euro zone economies like Italy, as a result of it will possibly modify its purchases of presidency bonds to insulate them from undue market volatility.