What will the ECB do? Today there is a decision on interest rates

Today we will receive the ECB's decision on the matter interest rates followed by a press conference by the President of the ECB, Christine Lagarde. The institution will probably not tighten its monetary policy. The inflation rate dropped significantly in September, which was in line with the bank's expectations. The economic prospects for the euro area are gradually deteriorating.

Many unknowns, many risks

After the last increase, the deposit rate is 4%. and refinancing 4,5%. and this is probably the peak of the entire tightening cycle. Representatives, of course EBC in their statements they do not completely rule out further steps upwards. If they thought otherwise, it would be risky with so many unknowns and so many risks. It must be admitted that the fight against inflation is not yet won. However, the vast majority of members of the Council believe that another increase is no longer required when inflation remains within the limits of the institution's last projection. Recent data indicated that the HICP index was 4,3% in September. y/y and the base 4,5 percent. which means a decrease from 5,2 percent, respectively. and 5,3 percent in August.

Another argument against an increase at the upcoming ECB meeting is the fact that a member of the Governing Council, Peter Kazimir, has recently admitted the particular importance of the upcoming projections in December and March. This suggests that in the future, as was the case before, The ECB will again prefer to take important decisions on meeting dates, where they are presented, and the bank's latest forecasts will be published only in December.

The effects of aggressive tightening of monetary policy

The recession in the euro zone is becoming more and more pronounced. This was confirmed by Tuesday's PMI data (43 industry points, 47,8 services points). Economic weakness is not concentrated only in Germany, as was the case in the winter half of 2022-2023, which resulted mainly from high energy prices. Currently, the effects of the aggressive tightening of monetary policy by the ECB (a total increase of 450 bp) are clearly visible. This factor also appeals for the decision to pause price increases.

Let us recall that during the last press conference after the September meeting, Lagarde also suggested that there would be no further steps to tighten monetary policy. The market consensus is therefore almost unanimous that we won't get any upward movement today.

Investors will now be focused on what the ECB will do in the coming months and will be looking for clues. In the face of increasingly worse economic prospects for the euro zone, market valuation indicates rate cuts by almost 50 basis points in 2024. At this point, the emphasis will be more on to keep rates high for some time. It is probably still too early to discuss when monetary policy will start to ease. The last increase was only 6 weeks ago.

Source: Łukasz Zembik, OANDA TMS Brokers