The ECB remains on pause and pause means waiting, not thinking about when to cut rates.
Contrary to her American colleague Jay Powell, who has already announced three drops for 2024, ECB President Christine Lagarde does not indulge the markets’ optimism, leaves rates stuck at 4.5% and reiterates that cuts are still out of the question. horizon, because inflation cannot yet be said to be tamed. And the line of rigor does not stop here: in the middle of next year the real closure of the extraordinary securities purchase program, the PEPP, begins, which began with the pandemic to support the European economy which was plunged into deep recession.
“We haven’t talked about cutting rates at all, we don’t believe it’s time to lower our guard, there is still work to be done and so we wait”, clarified the president, explaining that the ECB remains “dependent on the data” and that More information is needed on underlying inflation, which will only arrive in the coming months. Nominal inflation, however, remains on track. Even if we see a new increase due to energy in December, the ECB is revising its projections for 2023 and 2024 downwards. Experts now expect it to stand at 5.4% for this year, to 2.7%. the next, at 2.1% in 2025 and 1.9% in 2026. A better trajectory than expected, the result of the monetary tightening that began in July 2022 and continued uninterruptedly, with ten increases, until September.
Frankfurt’s decisions slowed down inflation, cooling the economy, which came close to recession.
For further information Agenzia ANSA Towards firm ECB rates, but the market is already looking to 2024 – News – Ansa.it First decline in mortgages for 24 months. (HANDLE)
Now forcing the ECB to also cut its growth estimates: the +0.7% forecast in September for 2023 has fallen to +0.6%, and the +1% for 2024 has fallen to +0.8%. Growth therefore remains “contained” in the short term, before recovering in the medium term due to the increase in real incomes – since families benefit from the fall in inflation and the increase in wages – and the improvement in external demand. That is, if global trade does not suffer new setbacks. The estimate for 2025 is unchanged (+1.5%), but it is still too early to predict what will happen to the economy which is threatened on several fronts. There remain the geopolitical risks of the two ongoing wars, in Ukraine and the Middle East, and the effects of the monetary tightening which have not yet been fully seen.
Lagarde’s words reached the markets clearly, with the Milan Stock Exchange first turning negative but then closing positive, like the other European ones. For several analysts, however, there is no room for too much optimism: the rate cut, which investors have been pricing in since March, is now postponed to June at least. But something is moving: the ECB no longer speaks of “inflation being too high for too long”, but explains that “it will gradually decline over the course of next year”.
Another element that prepares the ground for cuts in 2024 is the surprise decision to begin the retreat of the pandemic bond purchase program. “The PEPP has served its purpose, the pandemic is over, and the normalization of the ECB budget is welcome,” Lagarde said, explaining that the decision was taken by a “large majority”, although “some would have preferred a different roadmap”. The new PEPP purchases had already ended last year, but the ECB had decided to reinvest the repaid capital on bonds still maturing until the end of 2024, to avoid traumatic effects on government bonds. It will now reduce reinvestments by 7.5 billion euros per month starting from the second half of 2024. A risk for the countries that have benefited most from the extraordinary purchase program. For Lagarde there will be no shocks on the markets, but if something were to go wrong “there are tools that we will not hesitate to use”, such as the TPI, the purchase program designed to protect the transmission of monetary policy.
Lagarde: ‘We didn’t talk about cutting rates. There is still work to be done, let’s not let our guard down’
“We didn’t talk about rate cuts at all,” said the president of the ECB, Christine Lagarde, at the end of the Governing Council meeting when asked about the market’s expectations for a reduction in the first half of 2024. On inflation ” should we lower our guard? We asked ourselves. No, we absolutely shouldn’t”, he added, explaining that the ECB remains “dependent on data” and that more data on underlying inflation is needed which will arrive in the coming months, because there is a component that is struggling to decline.
“We don’t believe it’s time to let our guard down, there is still work to be done and so we wait,” Lagarde continued. The president reiterated that rates will remain at a sufficiently restrictive level for as long as necessary. “Some data plays a significant role,” and when it arrives “it will tell us whether it is time to let our guard down,” she added.
“The PEPP (pandemic bond purchase programme) has served its purpose – he said -. The pandemic is over, and the normalization of the ECB’s balance sheet is welcome. We do not see a risk of fragmentation (of the euro area markets ed. ) but the risk is there and to counter it there are tools that we will not hesitate to use, because the good transmission of monetary policy is part of politics itself”.
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