ECB Rate Decision: What to Look for on Thursday

Analysts expect no further rate hikes and a steady-as-she-goes message at tomorrow's ECB meeting in Athens, so any comments on quantitative tightening will raise eyebrows

Lukas Strobl 25 October, 2023 | 12:34AM
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On Thursday the European Central Bank (ECB) is widely expected to halt its interest rate hiking cycle that has persisted through each meeting since July 2022. 

"This is a meeting to discuss the complicating risk balance from higher energy prices and the rise in real yields, but not for policy action," Bank of America analysts wrote in a note on Friday, echoing the consensus across brokers. 

Receding inflation and a weak economic backdrop make the case for unchanged rates, with Monday's Eurozone Purchasing Managers' Index (PMI) reading below economists' forecasts with the worst reading since November 2020. The negative surprise points to recessions in many areas of the Eurozone, including Germany if growth remains negative through the final  quarter of the year.

Germany's October PMI of 45.8 was even below the Eurozone's weak 46.5 points. A reading below 50 indicates a contraction in business activity. 

The rapidly-developing conflict in the Middle East is an additional source of uncertainty making any revision to rates unlikely, the ECB meeting's host, Bank of Greece Governor Yannis Stournaras, told the Financial Times last week

At the same time, Stournaras signalled that the Pandemic Emergency Purchase Programme (PEPP) is a key talking point, as many members of the governing council push for a leaner balance sheet. The ECB's current guidance is that it will continue to re-invest assets held under PEPP until at least the end of next year.

While a change to that language is unlikely tomorrow, president Christine Lagarde will face questions of whether reducing excess liquidity, rather than raising interest rates, could become its new main lever against inflation. 

Analysts at Morgan Stanley see a phasing-out of PEPP reinvestments starting as early as the first quarter and wrapping up before the end of 2024. There are vocal opponents to such an accelerated quantitative tightening, with Italy warning an early end to PEPP reinvestments could be destabilizing. Due to the complexity of the problem, a firm decision is unlikely tomorrow. 

"Should markets calm down again over the coming weeks and months, we would still see a chance that the ECB might eventually bring PEPP-QT forward by a few quarters," UBS wrote in a note last week.

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Lukas Strobl  is the editorial manager for EMEA at Morningstar.

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